Personal Loan: How to choose the best scheme online in India

In simple terms, a personal loan is a kind of unsecured borrowing that you can opt for while making a big ticket purchase or tending to a family emergency. Personal loans are available in almost all banks and non-banking financial institutions alike.

Since the loan is unsecured, you don’t have to swear any asset as collateral. This means that unlike other loans such as auto loans or home loans, you don’t need to put up your property or gold or any other asset against a personal loan. So in case you default on a personal loan, the bank or non-banking financial institution cannot auction away your property to recover the default amount.

Usually, the interest rates are higher on a personal loan compared to other kinds of loans because they are unsecured loans.

Features of Personal Loan

A personal loan, as the name suggests, can be availed to meet any personal needs such as a deficit in your household income, a wedding, making a big-ticket purchase or to take care of a medical emergency.

The most important feature of a personal loan is that is an unsecured loan. So, a borrower does not have to swear an asset against the loan. The interest rates on personal loans are higher than other secured loans.

The loan is granted based on the borrower’s income, credit history, employment history as well as the borrower’s repaying capacity.

The duration of a personal loan could be from one year to five years. Longer tenures may be available on case-to-case basis. The minimum amount that one can borrow varies from bank to bank.

Benefits of Personal Loan

A personal loan is a better borrowing option than a credit card as you may be able to borrow a higher amount than what your credit card permits i.e. the credit limit.

Since a personal loan is an unsecured loan and does not require a collateral; you can save your assets from potential auction in case your default on the loan.

In case of personal loans, the repayment is done in equated monthly instalments (EMIs). So, the repayment schedule is fixed and right at the time of approval of your loan, you will know exactly how much you must repay, and the time required for the same.

You can also consolidate existing multiple loans under a single personal loan. It helps manage your borrowings better.

Personal Loan Eligibility Criteria

Do you wonder whether you are eligible for a personal loan? Well, the eligibility criteria for personal loans may differ from bank to bank or lender to lender. To figure out if you are eligible for a personal loan in a bank, you can visit their website and check.

Personal loans are available to both salaried individuals as well as self-employed individuals. It is important that you have a regular source of income to be eligible for a personal loan.

There are a few basic criteria that most banks put into place. They include your income level, your credit score, your employment history, your age, the city you live in and your repayment capacity.

How much a person can borrow depends on the borrower’s income. Usually, banks allow loans where potential EMIs for the borrower don’t exceed 50 per cent of the borrower’s monthly income.

Documents required for Personal Loan

Income proof is the most important document that is required while applying for a personal loan. You can submit your latest salary slip or recent income tax returns. Different banks and non-banking financial institutions in the market require different documents for personal loans but income proof is required by all lenders.

Other income proof banks also require address proof and identity proofs which can be submitted in the form of PAN Card, Driving Licence, Aadhaar Card, passport, utility bills among others. In some cases banks also ask for proof of employment, educational qualification and licence in case of self-employed businesspersons.

Personal Loan Interest Rates

The interest rate is the interest charged by a bank for borrowing funds from the bank. They are usually part of the EMIs payable every month. Interest rates are higher than other secured forms of loans. In most cases, the rate of interest charged by a bank depends on the borrower’s income level, credit history and repayment capacity.

Usually, there are two kinds of personal loans available depending on the interest rate charged by the bank—fixed rate loan and floating rate loan.

As the name suggests, the fixed rate personal loan is where the rate of interest is constant for the entire tenure of the loan. The interest is applied on the entire loan amount for the tenure of loan. The EMIs are fixed at the start of the loan and do not change going forward.

However, in a floating rate personal loan, the borrower pays interest only on the outstanding amount. So the interest payable decreases with time as does the amount payable. The outstanding goes on reducing as the borrower makes payment and hence interest decreases.

Top Banks offering Personal Loans in India

All nationalised and private sector banks offer personal loans. Apart from the banks, other non-banking financial services (NBFC) also offer personal loans.

State Bank of India: The bank offers floating interest rates to its personal loan borrowers. The interest rate could be anywhere between 12.75 per cent and 14.75 per cent. The minimum loan amount is Rs 25,000 and the maximum loan amount is Rs 15 lakh.

HDFC Bank: A flat interest rate of 15.50 per cent to 21.50 per cent is charged on personal loans up to Rs 40 lakh.

ICICI Bank: The bank charges interest rates that range from 11.25 per cent to 17.99 per cent per annum for loans up to Rs 20 lakh.

Kotak Mahindra: The interest rate charged by the bank ranges from 10.99 to 24 per cent on loans starting from Rs 50,000 up to a maximum of Rs 15 lakh.

IDBI Bank: A floating rate interest at 12.55 per cent is applicable for loans starting from Rs 50,000 to Rs 10 lakh as personal loan from IDBI bank.

Standard Chartered Bank: The rate of interest ranges from 10.99 per cent to 21 per cent for loans ranging from Rs 1 lakh to Rs 30 lakh. The loan can be repaid in one to five years.

Citibank: The bank charges interest rates ranging from 10.99 per cent to 17.99 per cent. The maximum amount that can be borrowed is Rs 30 lakh and the loan can be repaid in tenures ranging from one to five years.

Tata Capital: Personal loans for amounts ranging from Rs 75,000 to Rs 25 lakh is available at Tata Capital. They charge an interest rate of 11.25 per cent and the loan can be repaid in 12 to 72 months (one to six years).

Edelweiss: Personal loans are available for salaried personnel for up to six times their net monthly salary. The institution lends a maximum of Rs 10 lakh as a personal loan. The interest rate is much higher than other banks and financial institutions as Edelweiss charges 23 per cent per annum.

How to apply for Personal Loan

Applying for a personal loan becomes easier and the processing becomes faster if you have an account with the bank. Many banks also provide instant approvals online and disburse funds anytime from a few minutes to a couple of days.

You can walk in to the nearest branch of the bank you wish apply for. You can meet the relationship manager and ask for an application for personal loan.

If you are tech-savvy, the online application process much faster and you can simply scan and upload the documents required to speed up the process. If you have an account with the bank and are using the NetBanking facility of the bank, you can log in and apply directly. The bank will let you check your eligibility online.

If you don’t have an account with the bank, don’t worry. You can simply visit the bank’s website and fill in an application form online. Many banks also allow you to make a request for application via email or through phone banking. Once the bank checks your eligibility, bank executives will call you for the further processing of your application.

How to calculate EMI on Personal Loan

The EMI payable by you as repayment of your loan is based on your loan amount, tenure of loan and the interest rate charged by the bank. You need not get into the detailed calculations of your potential EMI. Most banks and non-banking financial institutions offer an online EMI calculator that helps you calculate your EMI and decide on the most desirable loan and rate of interest. To know more, you can check out MoneyControl’s Personal Loan EMI calculator here.

Otherwise, you can visit the bank’s website and find the EMI calculator. All you need to do is enter the loan amount you wish to take and the duration within which you want to pay. The bank will allows you to try various combinations of the three variables—loan amount, tenure and interest rate—so that you can make an informed decision. The software is free to use and you need not take a loan with the bank to use the EMI calculator.

Important Terms & Conditions

Although banks do not take as much time to process a personal loan application as a home or car loan, there are certain things you must keep in mind while applying for a personal loan.

All the information provided by you in the application form must be correct and the documents submitted along with the application must be in order.

Once the bank receives the application, it will verify the information provided by you. Bank executives may also visit you to complete Know Your Customer formalities.

Your income proof is an essential document and will help the bank decide how much loan you are eligible for. Apart from this, you must have a credit score of 750 or above to be eligible for a loan. If you have poor credit history, your application is likely to be rejected.

Make sure you do not default on your repayment. The bank will charge a fine if you are late in depositing your EMI. Separate charges will be levied if an EMI bounces. Additionally, if you miss multiple EMI deadlines, the bank may take legal action.

FAQs  

What counts as a personal loan?

Any loan taken for personal expenses is considered as a personal loan. If you are falling short of household income, you can avail a personal loan. If you need funds to support your child’s education, you can take a loan. To meet the expenses of a wedding, you can go for a personal loan. Many banks offer personal loans for you and your family to take a vacation or go on a holiday. Home renovations are also part of personal loans. A personal loan comes handy in times of need for paying for medical emergencies. These days people also choose to take a personal loan while buying a big-ticket products such as home appliances or gadgets.

Can I apply for a joint account personal loan?

Yes. Banks and financial institutions allow you to apply for a personal loan as an individual or jointly with a co-applicant. The co-applicant has to be a family member such as your spouse or your parents. The advantage of taking a loan jointly is that you can apply for a higher loan amount. However, if any of the two borrowers has a poor credit history, the loan application may be rejected.

How do I decide which bank to go for while applying for a personal loan?

Different banks offer different advantages, features as well as interest rates with their personal loans. The fees charged by banks are also different from one another. You should opt for a bank that best caters to your needs and provides you the best rate of interest. To find such a bank, you must compare the various personal loans offered by various banks and financial services.

Can I pay the entire loan ahead of my loan tenure?

Yes. This is called foreclosure or pre closure. You can completely pay off a personal loan even before the loan tenure has ended. However, the bank or financial institution may charge a penalty for closing your loan account ahead of time. It could be anywhere between 1 and 2 per cent of the outstanding amount.

You can also make a part payment where you pay off a part of your loan before it becomes due as per the EMI schedule. Here, too, the bank may charge a penalty.

If I pay the loan ahead of my loan tenure, will it affect my credit score?

Yes. If you pay your loan ahead of time, your credit score is likely to improve. The bank may, however, charge a penalty. If your loan account is closed, your credit score improves. It is only if you default or settle with the bank that your credit score will be affected negatively.

How long does it take the bank to approve a personal loan?

The time taken by a bank to process your application for a personal loan varies from bank to bank. However, if you have an account in the bank, the approval process is expedited. Some banks are now offering instant approval against loan applications. The loan amount in such cases are disbursed within a couple of days. However, in most cases banks take about a week to process loan applications and another few days to disburse the loan amount to your account.

Can I avail any tax benefit from a personal loan?

No. Unlike home loans and car loans, loans taken under the personal loan category do not offer any tax benefits. Having said that, if you have taken a personal loan for home renovations, the interest is eligible or deductions under section 24 of the IT Act. You will have to submit receipts for the same.

What are the fees and charges that a bank levies on a personal loan apart from the interest rate?

Banks and financial institutions levy various charges apart from the rate of interest. Some of these are:

    1. Processing fee: This is a fee charged by the bank or NBFC to process your loan application. It is a nominal charge and the rate if different for each bank. Some banks also offer relief from this charge and do not levy a processing fee.

    1. Prepayment/ part payment charges: Many banks do not allow your prepay or partly pay your loan off before 12 months of the first EMI. Thereafter, they charge a fine for paying the loan amount ahead of time. It is usually a percentage of the outstanding amount.

    1. Overdue EMI interest: This is an additional interest levied on the loan amount if EMI is not paid on time and is overdue.

    1. Stamp duty: This is applicable as per the state laws.

    1. Loan cancellation charges: The fee charged by a bank if you decide to cancel your loan application.

What happens if I miss an EMI?

Missing out on EMIs from your schedule is not advised. In case you miss an EMI in the schedule, the bank will charge a penalty on you for missing the deadline. If you miss multiple EMI schedules, you could be in for serious trouble. The bank will first try to settle the outstanding or send a recovery agent to your doorstep. If the account is not settled, the bank may initiate legal action against you.

Moreover, if you default on your loan, it becomes a part of your credit report. Your credit score is likely to go down if you default on a loan. You will in turn not be able to any loans in the future.

What happens is a credit score and how do I find out my credit score?

Credit score is basically a number that indicates your track record with respect to loans and other credits. So if you have been prompt in paying off all your debts in time, you are likely to have a higher credit score. If your credit history is bad, i.e, you haven’t been very punctual with your debt repayment, your credit score drops.

So if you have paid off your loan or debt in full, the account is closed and it boosts your credit score. However, if you settle your debt with the lender or if you default on the loan, you will be considered a ‘risky’ borrower. Your credit score will fall as a result.

A credit score of 750 or above is considered ideal for loans and borrowings. If you have a good credit score, not only are you an ideal candidate for loans but you can also negotiate terms of loan and rate of interest. You can find out your credit score by visiting the website of any bank or log on to the website of CIBIL to get your credit score.

How does a bank disburse a personal loan?

Once your loan application has been processed and approved, within 48 hours the bank will issue an account payee cheque in your name. You can also ask for an electronic account transfer to your account from the bank.

How do I pay my EMI?

EMIs have to be paid by you every month to the bank. You can either issue post-dated cheques in favour of your bank and deposit them with the bank or you could set up opt for a direct deduction of the EMI and transfer to the bank through Electronic Clearing Services.

What are the advantages if the borrower has an existing account in the bank where he/she is applying for a personal loan?

If you have an existing account, fixed deposit or even a credit card with the bank, you are likely to enjoy a few advantages. In such cases, banks offer a relationship discount to the borrower. These discounts vary from one bank to another. While some banks waive off processing fee, other offer a lower interest rate. Additionally, if you have an account with the bank, your loan application will be processed faster and loan disbursed quickly.

 

[“source=moneycontrol”]