Personal loans are becoming increasingly popular among consumers, particularly for large-ticket expenditures. They’re also breaking down their purchases into equal monthly payments (EMIs). Personal Loans help families cover any shortfalls they may have when buying a home or automobile, paying for their children’s higher education, or dealing with medical emergencies, among other things. To help you better comprehend a Personal Loan, here’s a rundown.
What Does a Personal Loan Entail?
Simply described, it is an unsecured loan taken out by individuals to suit their own needs from a bank or a non-banking financial corporation (NBFC). It is based on important factors including income, credit and employment history, repayment capacity, and so on.
A Personal Loan, unlike a home or auto loan, is not backed by any asset. Because it is unsecured and the borrower does not put up security such as gold or property to obtain it, the lender cannot auction anything you own if you default. Personal loans have higher interest rates than home, automobile, or gold loans because of the increased perceived risk when they are approved.
Defaulting on a personal loan, like any other loan, has its own set of consequences, as it will appear on your credit report and pose issues when you apply for credit cards or other loans in the future.
Uses of Personal Loan?
It can be used for any personal financial purpose, and it will not be monitored by the bank. It can be used to pay for house renovations, wedding expenses, a family vacation, your child’s schooling, the latest technological gadgets or home appliances, unforeseen medical expenses, or any other unexpected expenses. Personal loans can also be used to fund business ventures, car repairs, and the down payment on a new home.
Criteria for Eligibility
The typical criteria are your age, occupation, income, ability to repay the loan, and place of residence, though it differs for each bank. To qualify for a personal loan, you must have a steady source of income, whether you are employed, self-employed, or a professional. An individual’s eligibility is also influenced by his employer, credit history, and other factors.
The Maximum Loan Term
It can range from one to five years, or from twelve to sixty months. On a case-by-case basis, shorter or longer tenures may be permitted, but this is uncommon.
Disbursal of Loan Amount
It is usually disbursed within 7 business days of the lender receiving the loan application. Once accepted, you can choose to receive an account payee cheque/draft in the amount of the loan or have the funds electronically deposited into your savings account.
What is the Maximum Loan Amount Borrowed?
It is mainly determined by your earnings and differs depending on whether you are employed or self-employed. Typically, banks limit loan amounts so that your EMI does not exceed 40-50 percent of your monthly income.
When calculating the personal loan amount, any current loans that the applicant is responsible for are also taken into account. The loan value for the self-employed is calculated using the profit earned as reported on the most recent acknowledged profit/loss statement while taking into consideration any additional liabilities (such as current business loans, etc.).
Is There a Set Amount for a Loan?
Yes, though the precise amount varies depending on the institution. The majority of lenders have imposed a Rs 30,000 minimum personal loan principle amount.
What Bank or Financial Institution should You Borrow From?
Before deciding on a bank, it’s a good idea to evaluate its offerings. Interest rates, loan terms, processing fees, and other important elements to consider when choosing a loan provider.
What Factors Do Banks Consider When Determining the Maximum Loan Amount?
Although loan sanctioning standards vary by bank, your credit score, current income level, and liabilities are all important considerations in deciding the maximum loan amount that can be granted to you. A high credit score (closer to 900) indicates that you have adequately serviced prior loans and/or credit card dues, making lenders believe you are a safe borrower and thus sanctioning a larger loan amount.
Your repayment capacity is directly affected by your present income and liabilities (unpaid credit card balances, unpaid loans, current EMIs, and so on). As a result, if your salary is low or you have a lot of overdue credit card bills or loan EMIs, you will be approved for a smaller personal loan than someone with a higher income or fewer financial obligations.
Should I Always Choose the Loan Provider with the Lowest Feasible EMI?
A long payback term, a low-interest rate, or a combination of the two can all result in low EMI offerings. As a result, if you choose low EMIs, you may wind up paying more interest to your lender. Before making a decision, use online tools like the personal loan EMI calculator to calculate your interest payment over the loan term and your repayment capacity.
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Personal Loan Interest Rates
Personal loans have a higher interest rate than secured ‘home and automobile’ loans since they are unsecured. Many major banks and NBFCs currently provide such loans at interest rates as low as 11.49 percent. However, a borrower’s rate is determined by a number of parameters, including credit score, income level, loan amount and tenure, previous contact with the lender (savings account, loans, or credit cards), and so on.
Extra Charge Payable
Yes. A non-refundable fee is charged when applying for a personal loan, in addition to the interest payable on the principal amount. Processing costs, usually 1-2 percent of the loan principal, are charged by the lender to cover any documents that must be handled as part of the application process. If you have a long-term relationship with the lender, he may waive this fee.
Fixed or Floating Interest Rates
The EMIs for a fixed rate personal loan is fixed. Because it uses the lowering balance technique of computing interest payout on a personal loan, a floating rate ensures the EMIs keep decreasing. Floating rates may be altered on a half-yearly or annual basis under the new Marginal Cost of Funds based Lending Rate (MCLR) rules.
Reducing V/s Flat Interest Rate
As the name implies, with the former, the borrower only pays interest on the outstanding loan balance, that is, the sum that remains after the principal repayment has been made. The borrower pays interest on the whole loan balance during the loan term in a flat interest rate situation. As a result, even though the borrower makes periodic EMI payments, the interest payable does not reduce.
Can My Spouse and I Apply Together?
Yes, you can apply for a personal loan either individually or jointly with a co-applicant, who must be a family member such as your spouse or parents. Your loan application will be handled in a higher income category if you have a co-borrower, making you eligible for a greater loan amount. Keep in mind, however, that if you or your co-applicant have a terrible credit history, your loan application’s prospects of approval may be below.
Yes, although some banks only allow borrowers to pay back their loans once they have paid a set amount of payments. Partial prepayment is not permitted by some lenders. The outstanding loan amount may be subject to prepayment penalties.
Key Documents Required when Applying for a Loan
Though paperwork requirements differ by financial institution, you will need to present the following documents with your personal loan application:
- Income proof (salary slip for salaried/recent acknowledged ITR for self-employed)
- *Address proof documents
- *Identity proof documents
- *Certified copies of degree/licence (in case of self-employed individuals)
Paying Back the Loan
It can be returned in instalments using post-dated cheques (PDC) made in the bank’s favour or by releasing a mandate authorising payment via the Electronic Clearing Services (ECS) system.
Charges for Prepayment/ Foreclosure
If you pay off your loan before the term is over, you’ll be assessed a prepayment/foreclosure charge/penalty. This penalty is normally between 1% and 2% of the outstanding principal. Some banks, on the other hand, impose a larger fee to foreclose on a debt.
Part Payment, Prepayment, and Preclosure: what’s the Difference?
*A part payment is a payment that is less than the complete loan principle and is made before the loan is due.
*Prepayment: When you pay off a portion of your loan before it is due according to the EMI schedule. The amount paid in advance may or may not be equivalent to the total amount owed. Prepayment penalties typically vary from 2 to 5% of the outstanding loan balance. Furthermore, many banks prohibit prepayment or preclosure of a loan until a certain number of EMIs have been completed.
*Preclosure refers to paying off a personal loan in full before the loan term expires. Preclosure charges, like prepayment charges, range from 2-5% of the loan amount.
Process of Loan Approval
The approval is at the sole discretion of the loan sanctioning officer, who focuses his or her decision on the bank’s or financial institution’s criteria. The complete procedure can take anywhere from 48 hours to two weeks. The bank disburses the loan, if approved, within seven working days after all essential paperwork are provided and the verification process is finished. To avoid delays in loan processing and payout, maintain all essential documents on hand, including the PDC and/or signed ECS form.
Defaulting on EMI Payments
If you don’t pay your EMIs on time and are unable to make future payments, the lender will initially try to recover the debt through settlements and collection agencies. If these efforts fail and your loan account is designated as a default, the loan will appear as a default on your credit report, lowering your credit score and making it more difficult to obtain loan and credit card approvals in the future.
Although personal loans often do not provide tax benefits, if you use one for home improvements or a down payment, you may be eligible for an I-T deduction under Section 24. However, this tax benefit is only applicable to interest, not principal. You must also provide proper receipts to claim a deduction.
Balance Transfer Offer
In rare situations, a lender will allow you to transfer the balance (amount still owed) on your loan from one lender to another. The balance will be paid to the current lender by the new lender. You will repay the new lender payments plus any remaining interest on your loan at the completion of the balance transfer process.
A balance transfer allows you to take advantage of the new lender’s lower interest rate; however, there may be additional fees, such as a balance transfer fee or prepayment charges.
Why do My Early EMIs have Such a Small Impact on the Amount Owed?
The interest payable on your loan is paid off with a large chunk of your initial EMIs. This is known as “front-loading,” because just a portion of the principal is paid off at first. As you make progress on your EMIs, these little reductions in the principal amount pile together, lowering the interest paid on the outstanding balance. In later years, a bigger amount of the EMI is utilized to pay off the loan principal.
A Personal Loan Versus a Credit Card Loan
You may be eligible for a credit card loan if you have a credit card. This type of loan is only available on specific cards, and you can only get one through your card issuer. In the case of a personal loan, though, you can approach any lender. In addition, unlike personal loans, car loans do not require any further proof.
Score and Credit Report
Because a personal loan is an unsecured loan, your credit history is normally taken into consideration during the approval process. In India, there are three credit reporting agencies: Equifax, Experian, and CIBIL TransUnion.
All three have partnerships with lenders and offer credit rating services to assist lenders in evaluating potential borrowers. Credit information services are provided by Experian India in partnership with Union Bank of India, Sundaram Finance, Punjab National Bank, Magna Finance, Indian Bank, Axis Bank, and Federal Bank.
State Bank of India, Union Bank of India, ReligareFinvest Limited, Kotak Mahindra Prime Ltd, and Bank of Baroda are among Equifax India’s partners.
Credit Bureau (India) Ltd (CIBIL) is the country’s first credit information company, and it is a worldwide recognised credit reporting agency.
All three keep meticulous records of you