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Personal Loan Overview

What's a Personal Loan?

A loan used to cover a number of personal expenses may be known as a Personal Loan. A Personal Loan happens to be an unsecured loan, by way of which you can borrow money for personal expenses depending on interest rates, processing fees, the amount you seek, and the repayment terms.

This loan, also known as a consumer loan can be used as a multipurpose borrowing to meet immediate requirements. Such a loan can be taken for home renovation, car repair, vacation expenses, marriage expenditure, or any other immediate expense the lender would be willing to approve depending on your credit score, repayment history, income, and other such important criterion. Borrowed as an initial lump sum, you pay a lower interest rate along with the principal sum over a predetermined period.

Make sure to plan your finances and budget before applying for a personal loan.

When can you opt for a Personal Loan?

You can opt for a Personal Loan when you have an emergency at hand, or require some immediate upfront funds to fulfil pressing and urgent needs. Banks, Non-Banking Financial Institutions, and Lenders offer Personal Loans for almost every requirement that include:

  • Marriage Expenses
  • Home Renovation and Repair
  • Travel, Holiday, or Vacation Expenditure
  • Medical, or Medical Emergency Expenses
  • Financing Debt Consolidation
  • Education, or Higher Education Expenses
  • Financing Auto Repair
  • Festival Expenditure

You can opt for these financing options for your immediate and pressing needs since approvals are quick and easy, and documentation requirements are at a minimum.

Eligibility

Personal Loan Eligibility Criteria

When you're in need of a Personal Loan, you can avail upto Rs. 25 Lakhs by qualifying with certain eligibility criteria which are quite minimal. The basic eligibility criteria are as follows:

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    Age

    When you apply for a personal loan, your age becomes an important criterion as a measure of your ability to repay the loan. Ordinarily, a lending institution will not deny you a loan if you are a salaried person aged between 21 to 58 years. If you are a self-employed businessman, or a businesswoman, or a professional, your age must be between 25 to 65 years.

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    Employment

    If you are a salaried individual, you must be employed by an MNC, a Public Limited Company, or a Private Limited Company. Other than this, if you are a self-employed person, a professional, or a businessman, you too are eligible to apply for a personal loan.

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    Term of Employment

    Your term or period of employment becomes a measure of your reliability to repay a loan in time when you look for a personal loan. If you have been changing jobs frequently, this may make the lending institution think twice. Generally, loans are sanctioned to those who have at least two years of work experience, and one year with the current employer. Likewise, self-employed professionals must show a minimum of 3 years of experience for loan approval.

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    Income

    The minimum monthly income criterion for approval of your personal loan varies from institution to institution, which starts from Rs. 20,000 per month upwards.

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    Residence

    If you are planning to apply for a personal loan to fund your requirements, you must be a Resident Citizen of India.

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    CIBIL Score

    Like other credit information bureaus, Credit Information Bureau India Limited or CIBIL collects financial data pertaining to individuals to determine a Credit Score that ranges from 300 to 900. When you choose to apply for a personal loan, remember every institution considers your CIBIL Score as the most important measure of your creditworthiness. Your CIBIL Score must be at a minimum of 700. A higher score empowers you to negotiate a loan with the best terms and conditions for yourself.

Personal Loan - Documentation

What Documents do you require for Personal Loan Approval?

Your documents form the basis your loan approval. With the number of loan applications awaiting approval at the lenders' office, clear and precise documentation improves the chances of your loan being approved faster. Documents that you may be asked to furnish along with your application are listed below.

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    Proof Age

    For a Personal loan, you are required to furnish one or more document to prove your age. Following are the documents generally required by most lending institutions.

    • Birth Certificate
    • Passport
    • Aadhaar Card
    • Voter ID
    • PAN Card
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    Residence or Address Proof

    To prove your residency, or resident status, you may be required to furnish one or more the following documents.

    • Aadhaar Card
    • Passport
    • Electricity Bill
    • Telephone Bill
    • Ration Card
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    Employee ID Card

    If you are a salaried person, some lending institutions may ask you for a document pertaining to your employment. This would mean that you are required to furnish your Employee ID Card as proof.

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    Proof of Income

    You are required to furnish documents related to your income depending on your occupation. This proof of income document depends on the lender.

    • Salary Slips
    • (If you are salaried person, Salary Slips are a proof of income. Depending on institution to institution, you may require to furnish minimum 2 months Salary Slips as proof.)

    • Bank Statements
    • (Generally, institutions require Salaried Bank Account Statements of previous 3 months for loan approval.)

    • Income Statements
    • (Some institutions require a person to furnish an Income Statement as proof of income depending on the nature of your occupation.)

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    Tax

    Approval of your loan requires that a tax paid document be furnished. This may differ from person to person and lender to lender.

    • Form 16
    • (A Salary TDS Certificate or Form 16 certifies that you are a salaried individual whose employer deducts tax from his employee's salary. This document acknowledges that tax has been deducted, and deposited with the Income Tax department.)

    • Latest Income Tax Returns
    • (This document proves that you have paid your income tax. Some lenders insist on latest income tax returns..)

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    Credit Report

    Credit Information Bureaus collect information about an individual's financial status with records of payments, settlements, dates, and other information that determine creditworthiness. These records form a Credit Report, which you have to furnish when you look for a personal loan. Most of the lending institutions in India ask you for your CIBIL Score along with your CIBIL Credit Report.

Online, there are many lenders, and the documents required differ from lender to lender. These mandatory documents along with a statutory number of photographs need to be furnished along with your personal loan application for approval. Once approved, a duly signed agreement copy will be sent to you.

You then need to provide a Standing Instruction Request / ECS Mandate Form, and security deposit cheques to complete the formality. ECS stands for Electronic Clearance Service. Likewise, an ECS Mandate gives the authority to the clearinghouse to debit your monthly EMI from your bank account, and credit the same into your loan account, or lenders account on a fixed predetermined date.

Interest Rates

Personal Loan Interest Rates

Interest Rates on Personal Loans in India vary from institution to institution. These rates range from 10.25% upward to 22.00%, low rates apply for employees of reputed corporates, or borrowers with good existing relationships with lending institutions. Which means that if you are a salaried person working with a reputed company, you have not defaulted on payments, and you have a good relationship with your lending institution, you are eligible for lowest rates? This also means, you're charged lower rates for a higher loan amount if you are an employee of a large reputed company.

Personal loan interest rates also differ across lenders depending on type personal loan applied for, and the type of borrowers that range from salaried employees and self-employed persons, to pensioners and woman borrowers, and the type of personal loan.

If you are a self-employed professional, your interest rate will depend on you income certificates, and repayment capability. Pensioners are eligible for lower interest rates, while women borrowers are eligible for the lowest rates.

Factors Interest Rates

What are the Factors that affect your Personal Loan Interest Rates?

Listed below are a few factors that affect interest rates on your personal loans.

  • Credit Score

    Banks and Lending institutions ask for you CIBIL Score to determine your creditworthiness, and repayment ability. Generally, personal loans lenders consider 700 as a good score. A lower credit score may get a personal loan with a higher rate of interest, or may not receive a loan at all.

  • Income

    Your income happens to be one of the most important to determine your loan repayment ability. This necessarily means that higher your income, lower the interest rate depending on your lending institution.

  • Repayment History

    Your repayment history establishes the state of your finances, and determines you financial discipline. Good repayment history ensures lower interest rates, while defaults characterize your ability to repay as risky.

  • Banking or Lender Relationship

    Old customers with savings or investment accounts are offered lower rates of interests to reciprocate, and maintain a good stable customer to lender relationship.

  • Employer Reputation

    In case you are a salaried employee, the reputation of your company plays an important role in ensuring a low interest rate. Lenders consider well-known and steady organizations as a factor to job security.

Personal Loan Fees and Charges

What are the other Fees and Charges for Personal Loan?

Every time you make an application for a Personal Loan, you may be pre-occupied with larger details such as the principal loan amount, and the interest rates payable apart from the paperwork. You need to consider a few other fees and charges applicable to ascertain the affordability, or the total cost of the loan. Let's shine some light on these charges and fees that seem hidden at first.

Factors Interest Rates

What are the Factors that affect your Personal Loan Interest Rates?

Listed below are a few factors that affect interest rates on your personal loans.

  • Processing Charges

    Banks, NBFCs, and other Lending Institutions bear operational costs that vary from institution to institution during the time of processing your personal loan. These costs chargeable to you are known as processing charges or fees, which range from 0.5% to 2.50%. Depending on the institution, you could opt to pay this fee straight away upfront, or you may ask for the fee to be deducted from the actual loan amount at the time of disbursement. Processing fees are generally non-refundable fees, which add to the cost of your loan.

  • Verification Charges

    Your lender checks your loan repayment capacity before loan disbursement. This brings the hiring of an agency or a third party into the picture to verify your credentials. This agency verifies your credit score, your repayment records, etc., to ascertain your creditworthiness. You are charged this additional costs incurred by the bank as verification charges.

  • Goods and Services Tax or GST

    GST has come to replace Service Tax or ST, and Value Added Tax or Vat applied on loan related services. This has to be paid during sanctioning of the loan, or during repayment of loan, and barely finds mention in the documentation process. This means you pay a standard 18% on any loan processing service as GST.

  • Cancellation Charges

    If you choose to cancel a personal loan after approval, or disbursal, the lender may charge you a cancellation charge, which may be a flat Rs. 1000 to Rs. 3,000 with an additional 18% GST. Some may not charge you a flat fee, but an applicable interest rate between loan disbursal and cancellation days.

  • Prepayment Penalty

    Some lenders may offer you a loan without prepayment penalty. However, others will charge you a prepayment penalty fee ranging from 2% to 5% of your outstanding loan amount for paying your loan off early.

  • Late Payment Charges

    Paying your EMI or Equated Monthly Instalment late would attract late payment charges ranging from 2% to 3% of the EMI amount, which would increase the cost of your loan.

  • Repayment Mode Swapping Charges

    If you change or swap your repayment mode during the loan tenure, you may be asked to pay a swapping charge of Rs. 500 plus additional GST.

  • Duplicate Documentation Charges

    You may have to pay a duplicate documentation charge ranging from Rs. 50 to Rs. 500 with the addition of GST in case you request a re-issue of loan-related documents.

  • Other Charges

    Charges vary from lender to lender depending on the type of lender, your repayment behaviour, place of loan sanction. Check with your lender for stamp duties and other legal charges.

Types - Personal Loan

What are the Different Types of Personal Loan in India?

Personal Loans offered by banks, NBFCs, and lending institutions cater to a variety of financial needs. The lending criteria vary from institution to institution. Here are the different types of Personal Loans offered in the market.

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