Personal loan is an unsecured loan provided by a bank or non-banking financial company (NBFC) to an individual on the basis of key criteria such as income level, credit history, repayment capacity, employment history and other relevant factors that tend to vary from lender to another. Also known as a signature loan, a personal loan is extended to salaried and self-employed individuals alike on the basis of a judgment call made by the loan sanctioning officer on the basis of documentation submitted by the applicant.
As a personal loan is unsecured and you do not put up collateral such as property or gold to avail it, in case of a default, the lender cannot put up anything you own up for auction. Due to the greater perceived risk when sanctioning this loan, the interest rates are higher as compared to a home, gold or car loans. However, like any other loan, defaulting on a personal loan is definitely not a good idea, as it would show up on your credit report and lead to problems when you attempt to apply for credit cards or other loans in the future.
Q1. What can I use a personal loan for?
A personal loan can be used for almost any type of expense ranging from big ticket appliance purchases and home renovations to luxury vacations and debt consolidation. Some other cases where personal loans may be useful include payment to unexpected medical bills, investment in business, fixing your car, down payment of new house and much more.
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Q2. Am I eligible for personal loan?
You must have a regular source of income to avail a personal loan whether you are a salaried individual, self-employed business person or a professional. A person's eligibility is also affected by the company he/she is employed with, his/her credit history his/her residential location and other factors as per the lender’s criteria.
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Q3. Is there a minimum personal loan amount that I need to borrow?
Yes. Though the exact amount of the minimum personal loan amount varies from one lending institution to another, most lenders have set their minimum personal loan principal amount at Rs. 30,000.
Q4. How is the maximum loan amount decided?
When calculating the maximum personal loan amount in case of salaried people, the bank/financial institution takes care that the EMI does not exceed 30% to40% of the applicant’s take home salary. Any existing loans that are being serviced by the applicant are also considered when calculating the personal loan amount. And, for the self employed, the loan value is determined on the basis of the profit earned as per the most recent acknowledged Profit/Loss statement, while taking into account any additional liabilities (such as current loans for business etc.) that the applicant might have.
Q5. What is the tenure of a personal loan?
Personal loans feature tenure of 1 year to 5 years or 12 to 60 months. In rare cases, shorter or longer personal loan tenures may be allowed by the borrower on a case by case basis.
Q6. Can I apply for a personal loan jointly with my spouse?
Yes, personal loan can be applied either by yourself (singly) or together with a co-applicant (jointly).The co-applicant needs to be a family member like your spouse or parents. By getting a co-borrower, your loan application will be processed in a higher income bracket, enabling you to avail a larger loan amount. However, keep in mind that if either you or your co-applicant have poor credit history, the chances of success of your loan application may be adversely affected.
Q7. What are the key documents required when applying for a personal loan?
Though the documentation requirements of personal loans vary from one financial institution to another, some of the key documents that you would need to provide with your personal loan application include:
Income proof (Salary Slip for salaried/recent acknowledged ITR for self-employed)
Address Proof Documents
Identity Proof Documents and others
Certified copies of degree/license (in case of self-employed professional) and others as per the lender’s criteria.
Q8. What are the key steps in the loan approval process?
Approval of loan is at the sole discretion of the loan sanctioning officer who bases his/her decision on the basis of the criteria specified by the bank/ financial institution. The entire process can take from about 48 hours to about two week's time. Once all the necessary documents are submitted and the verification process is completed, the loan, if sanctioned, is disbursed within seven working days by the bank. In order to avoid delays in loan processing and disbursement, do keep all necessary documents ready along with the post dated checks (PDC) and/or signed Electronic Clearing System form.
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Q9. How to decide which bank/financial institution to take the loan from?
It is always a good idea to compare the offers of individual banks before you decide to settle on a specific provider. Use online tools like the loan eligibility calculator personal loan EMI calculator to find the loan option that suits you the best. Some of the key factors to consider when deciding on a loan provider include interest rates, loan tenure, processing fees and others.
Q10. How do banks decide the maximum personal loan amount that I can get?
Though loan sanctioning criteria may differ from one bank to another, some of the key factors that determine the maximum loan amount that may be sanctioned to you include –credit score, your current income level and your current liabilities. A high credit score (closer to 900) shows that you have serviced your previous loans and/or credit card dues in a proper manner, which would lead lenders to feel that you are a safe borrower leading to the sanction of a higher loan amount. Your current income level and your liabilities (outstanding credit card dues, unpaid loans, current EMI’s etc.) have a direct bearing on your repayment capacity. Therefore, if you are in a lower income bracket or have a large amount of unpaid credit card bills or outstanding loan EMI, you would be sanctioned for a lower personal loan amount compared to an individual with a higher income or fewer financial liabilities.
Q11. Should I always choose the lowest possible EMI when choosing my loan provider?
Low EMI offers can typically result from a low interest rate, a long repayment term or a combination of the two factors. Thus in some cases, you might end up paying a lot more to your lender as interest if you choose the lower EMI option. Instead use online tools like the personal loan EMI calculator to figure out your interest payout over the loan tenure and your repayment capacity before making your decision.
Q12. What are the prevailing rates for personal loans?
Being unsecured loans, personal loans feature a higher rate of interest as compared to secured loans such as home loans and car loans. At present, many leading banks and NBFCs in India are offering personal loans at interest rates as low as 11.49%. However, the rate of interest applicable to a specific applicant would be contingent on key factors including credit score, income level, loan amount and tenure, previous relationship (savings account,loans or credit cards) with the lender as well as other factors.
Q13. How do I compare the interest rates of personal loans?
Log on to Paisabazaar.com and fill out our personal loan eligibility tool to get a list of all available personal loan option along with key data such as applicable interest rate, processing fees as well as information about other charges such as pre-payment charges. Using these data, you can easily compare the various personal loan options available with multiple banks and NBFCs.
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