An increasing number of consumers are now taking personal loans for their purchases, especially the big-ticket ones. They are also converting their purchases into equated monthly installments (EMIs).
Personal loans help the households meet any shortfall they experience in buying a house or a car, in children’s higher education, or even in cases of medical contingencies, among other things.
Here’s a low down on personal loans to understand them better.
what is a personal loan?
Simply put, it is an unsecured loan taken by individuals from a bank or a non-banking financial company (NBFC) to meet their personal needs. It is provided on the basis of key criteria such as income level, credit and employment history, repayment capacity, etc.
Unlike a home or a car loan, a personal loan is not secured against any asset. As it is unsecured and the borrower does not put up collateral like gold or property to avail it . the lender, in case of a default, cannot auction anything you own. The interest rates on personal loans are higher than those on home, car or gold loans because of the greater perceived risk when sanctioning them.
However, like any other loan, defaulting on a personal loan is not good as it would reflect in your credit report and cause problems when you apply for credit cards or other loans in future.
For what purposes can it be used?
It can be used for any personal financial need and the bank will not monitor its use. It can be utilized for renovating your home, marriage-related expenses, a family vacation, your child’s education, purchasing latest electronic gadgets or home appliances, meeting unexpected medical expenses or any other emergencies.
Personal loans are also useful when it comes to investing in business, fixing your car, down payment of new house, etc.
Maximum loan duration
It can be 1 to 5 years or 12 to 60 months. Shorter or longer tenures may be allowed on a case by case basis, but it is rare.
Although it varies from bank to bank, the general criteria include your age, occupation, income, capacity to repay the loan and place of residence.
To avail of a personal loan, you must have a regular income source, whether you are a salaried individual, self-employed business person or a professional. An individual’s eligibility is also affected by the company he is employed with, his credit history, etc.
Disbursal of loan amount
Typically, it gets disbursed within 7 working days of the loan application to the lender. Once approved, you may either receive an account payee cheque/draft equal to the loan amount or get the money deposited automatically into your savings account electronically
How much can one borrow?
It usually depends on your income and varies based on whether you are salaried or self-employed. Usually, the banks restrict the loan amount such that your EMI isn’t more than 40-50% of your monthly income.
Any existing loans that are being serviced by the applicant are also considered when calculating the personal loan amount. 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 he might have.
Is there a minimum loan amount?
Yes, though the exact amount varies from one institution to another. Most lenders have set their minimum personal loan principal amount at Rs 30,000.
From which bank/financial institution should one borrow?
It is good to compare the offers of various banks before you settle on one. Some key factors to consider when deciding on a loan provider include interest rates, loan tenure, processing fees, etc.
How do banks decide on the maximum loan amount?
Although the loan sanctioning criteria may differ from one bank to another, some key factors determining the maximum loan amount that can be sanctioned to you include your credit score, current income level as well as liabilities. A high credit score (closer to 900) means you have serviced your previous loans and/or credit card dues properly, leading the lenders to feel that you are a safe borrower, leading to a higher loan amount being sanctioned.
Your current income level and liabilities (outstanding credit card dues, unpaid loans, current EMIs, 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 will be sanctioned a lower personal loan amount than those with a higher income or fewer financial liabilities
Fixed or floating interest rates
For a fixed rate personal loan, the EMIs remain fixed. Floating rate means the EMIs keep decreasing as it follows the reducing balance method of calculating interest payout on a personal loan. As per the new Marginal Cost of Funds based Lending Rate (MCLR) rules, floating rates may be changed either on a half-yearly or annual basis.
Can I apply jointly with my spouse?
Yes, you can apply for a personal loan either yourself (singly) or together with a co-applicant (jointly), who needs to be a family member like your spouse or parents. Having a co-borrower means your loan application will be processed in a higher income bracket, making you eligible for a larger loan amount. However, keep in mind that if you or the co-applicant has a poor credit history, the chances of success of your loan application may be low.
Should I always go for the lowest possible EMI when choosing a loan provider?
Low EMI offers can typically result from a long repayment term, a low interest rate, or a combination of the two factors. Thus, sometimes, you may end up paying more interest to your lender if you choose low EMIs. So use online tools like the personal loan EMI calculator to find out your interest payout over the loan tenure and your repayment capacity before taking a call.
Being unsecured loans, personal loans have a higher interest rate than those on secured ‘home and car’ loans. At present, many leading banks and NBFCs offer such loans at interest rates of as low as 11.49%. However, the rate applicable to a borrower is contingent on key factors, including credit score, income level, loan amount and tenure, previous relationship (savings account, loans or credit cards) with the lender, etc.
Extra charge payable
Yes. In addition to the interest payable on the principal amount, there is a non-refundable charge on applying for a personal loan. The lender charges processing fees, usually 1-2% of the loan principal, to take care of any paperwork that needs to be processed as part of the application process. The lender may waive this charge if you have a long-term association with him.
Difference between reducing and flat interest rate
As the name implies, in the former, the borrower pays interest only on the outstanding loan balance, i.e., the balance that remains outstanding after getting reduced by the principal repayment. In flat interest rate scenario, the borrower pays interest on the entire loan balance throughout the loan term. Thus, the interest payable does not decrease even as the borrower makes periodic EMI payments.
Yes, however, some banks allow borrowers to prepay the loan only after certain number of repayments has been made. Some lenders do not allow partial prepayment. Prepayment charges may be levied on the outstanding loan amount
Key documents required when applying for a loan
Though the documentation requirements vary from one financial institution to another, some key documents you will have 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
*Certified copies of degree/license (in case of self-employed individuals)
Repaying the loan
It can be repaid in the form of EMIs via post-dated cheques (PDC) drawn in favor of the bank or by releasing a mandate allowing payment through the Electronic Clearing Services (ECS) system.
Loan approval process
The approval is at the sole discretion of the loan sanctioning officer whose decision is based on the criteria specified by the bank/financial institution. The entire process can take between 48 hours and about two weeks. 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. Do keep all necessary documents ready along with PDC and/or signed ECS form to avoid delays in loan processing and disbursement.
if you decide to pay off your loan before its tenure has completed, you get charged an additional fee called prepayment/foreclosure charge/penalty. This penalty usually ranges between 1 and 2% of the principal outstanding. Some banks, however, charge a higher amount to foreclose a loan.
Difference between part payment, prepayment and pre-closure
*Part payment: This amount is less than the full loan principal amount and is made before the loan amount becomes due.
*Prepayment: When you pay off your loan in part before it becomes due as per the EMI schedule. The prepayment amount may or may not be equal to the total due amount. Prepayment charges are usually in 2-5% range of the outstanding loan amount. Additionally, many banks do not allow prepayment/pre-closure of loan before a specified number of EMIs have been completed.
Defaulting on scheduled EMIs
If you miss your scheduled EMIs and are unable to make future payments, the lender first will try to recover the due amount through settlements and recovery agents. If such attempts fail and your loan account is marked as a default, the loan will show up on your credit report as a default, adversely affecting your credit score and making it difficult for you to get loan and credit card approvals in future.
Although personal loans usually have no tax benefits, but if you take one for home renovations/down payment, you may be eligible for I-T deduction under Section 24. However, this tax benefit is limited to only the interest, not the principal amount. Also, to claim deduction, you will have to furnish proper receipts.
Balance transfer offer
A lender, in some cases, will allow you to transfer the balance (amount still to be repaid) on your loan from the present lender to a new one. The new lender will pay off the balance amount to the present lender. At the end of the balance transfer process, you will owe the new lender payments plus applicable interest that is left on your loan.
A balance transfer helps you benefit from the lower interest rate offered by the new lender, however, there are a few charges such as balance transfer fee, prepayment charges, etc., that may be applicable.
Why do my initial EMIs have little impact on the principal amount due?
A major portion of your initial EMIs is actually used to pay off the interest due on your loan. This process is called “front loading”, hence only a small portion of the principal is paid off initially. As you progress further with your EMIs, these small decreases in the principal amount add up, leading to a decrease in the interest charged on the outstanding amount. A larger portion of the EMI is, thus, used to pay off the loan principal in later years.
Personal loan versus loan against credit card
Credit card loan is an offer that you may be able to avail on your card. Such a loan is only applicable to specific cards and you can only approach your card issuer for a loan on it. When it comes to a personal loan, on the other hand, you can approach any lender. Moreover, unlike a personal loan application, card loans don’t require any additional documentation.
Credit report and score
Since a personal loan is an unsecured loan, therefore your credit history usually plays a significant role in the approval process. Equifax, Experian and CIBIL TransUnion are the three credit reporting agencies that operate in India.
All 3 have tie-ups with lenders and provide their credit rating services to help lenders evaluate prospective borrowers. Experian India has collaboration with Union Bank of India, Sundaram Finance, Punjab National Bank, Magna Finance, Indian Bank, Axis Bank and Federal Bank to provide credit information services.
How is having a higher credit score beneficial?
A higher credit score indicates that you have a good track record with respect to loans. Therefore, if your credit score is high (more than 750 in case of CIBIL TransUnion), your chances of being granted a loan are much. Additionally, you may be able to negotiate benefits such as a lower interest rate, higher loan amount, waiver of processing charges, etc., by leveraging your high credit score.
- Flexibility to Use Funds:Unlike other loan options, the funds raised through a personal loan can be used freely as per the needs of the individual borrower. Personal loans can be used to overcome any financial hardships, marriage or medical related expenses, house renovation or any other financial need of the borrower without any preconditions.
- No Security:Personal loans are approved based on the income details and financial history of the borrower and not over any fixed asset as security or collateral. Since personal loans do not require any collateral or security to be mortgaged with the bank for loan approval, they are easy to use for a vast majority of people.
- Flexible Quantum of Loan:Based on the borrower’s financial history and credit report, personal loans are available for requirements as low as Rs. 10,000 to as high as Rs. 15 Lakhs or 20 lakhs, depending on the bank or NBFC concerned.
- Flexible Tenure:The tenure of a personal loan is also quite broad depending on the bank and the loan amount. Personal loans are available for a tenure period ranging from 12 months to 60 months, making it an ideal financial instrument compared to other options like credit card loan or gold loan.
- Minimal paperwork: A personal loan requires very little paperwork when compared to other types of loans.
Various banks and NBFC’s offer personal loans to all applicants fulfilling their basic eligibility criteria. While different banks have different minimum eligibility criteria, the criteria common for most banks and NBFCs for individuals requesting a personal loan include:
Personal Loan Eligibility Details
Different banks and NBFCs have different minimum documentation requirement for personal loans. The common documents required by most banks and NBFCs for individuals requesting a personal loan include:
Documents for Salaried Individuals:
- Proof of Identity: Voters ID, PAN, Aadhaar, Passport, Driving License, Voters ID or PAN Card, etc.
- Proof of Residence: Aadhaar, Driving License, Electricity bill, Ration Card, Passport or utility bills, etc.
- Latest 6 months Bank Statement of Salary Account.
- Salary slips for last 3 months.
- Additional Documents: 2 years employment continuity document.
FinFico.com, Tamilnadu’s premier financial market place has collaborated with various public sector and private banks to offer customized personal loans for its users. Users can apply for a personal loan online using FinFico.com online loan request tool.
Easy Eligibility Check: The loan calculator tool at FinFico.com checks for the user’s personal loan eligibility instantly. The tool also offers customized quotes for all eligible users as per their financial credit history and eligibility criteria.
Instant Quotes: The eligible loan applicants are offered instant quotes customized as per their profile and with a discounted interest rate.
Real time Loan Comparison: FinFico.com also offers a simple online personal loan comparison tool allowing users to compare the loan offers of various banks. Feedback shared by previous successful personal loan applicants acts as a helpful tool for new applicants to get the best personal loan deal.
Assured Privacy: All personal loan applications submitted with FinFico.com are sent only to the concerned bank department assuring complete privacy and transparency.
How to apply for a personal loan on FinFico.com?
Applying for a personal loan at FinFico.com involves three simple steps:
Step 1: In the first step, the user must fill the personal loan eligibility form available online with required personal data. Once submitted the personal loan tool automatically checks for eligibility of the applicant and personalized personal loan options.
Step 2: In the second step, the applicant can compare various personal loan options offered by the tool interface and apply for the best suitable loan.
Step 3: The last step involves receiving an instant e-approval from FinFico.com after successful submission of personal loan application online.
The application is sent to the selected bank. The loan department of the concerned bank gets in touch with the applicant directly. Users can check the status through one simple call.
Personal Loan Application Checklist
- One or Two Passport size color photographs
- Photo Identity Proof
- Residence Address Proof
- Residence Ownership Proof
- Job Continuity Proof for Salaried Individual
Last Six Months Bank Statement
Personal Loan Interest Rates
- Different banks and non-banking financial companies offer different interest rates for personal loans. Most banks have their own unique different classification based on which interest rates are calculated. Personal loan interest rates of various banks vary from 10.85 to 18.50% depending on the eligibility criteria, the loan amount and the tenure period of the personal loan.
Personal Loan Interest Rates Table
Personal Loan Interest Rates
- Different banks and non-banking financial companies offer different interest rates for personal loans. Most banks have their own unique different classification based on which interest rates are calculated. Personal loan interest rates of various banks vary from 10.85 to 18.50% depending on the eligibility criteria, the loan amount and the tenure period of the personal loan.
How to calculate EMI for Personal Loans?
EMI calculation for personal loan is now made easy using the EMI calculator available at FinFico.com. The Personal Loan EMI Calculator tool allows users the option of changing the loan amount and tenure while calculating the EMI for the personal loan. EMI loan calculator tool is a great option allowing users to see their monthly installment for the loan, helping them to choose the most suitable loan as per their financial budget.
When you are applying for a personal loan from a bank or an NBFC, you will need to maintain a proper checklist in order to have a smooth lending process.
- First, you need to check if you are eligible for a personal loan. Next, you need to find out if you will receive the loan amount that you are interested in.
- You will need to submit certain important documents mandatorily as sources of proof. You will need to give a proof of your residential address, your photo identity, your income, and your job status or job continuity. You will also need to provide with your bank statements and a recent passport size color photograph.
- For proof of address, you can give your ration card, utility bill or passport.
- For age proof, you can provide your passport, driving license, voter ID card, or PAN card.
- For identity proof, you can furnish your passport, driving license, PAN card, or voter ID card.
- If you are a salaried employee, you can get the most recent salary slips for 3 months, bank statements for a period of 6 months, and Form 16.
- If you are a self-employed individual, you can furnish your income tax returns, profit and loss account, income statement, and balance sheet for income proof. For office address proof, you can give property document, utility bills, or maintenance bills.
- Along with these documents, you will need to submit your duly-filled loan application form with relevant details. You must make sure that you have filled every field with accurate details. If you miss out on filling any of the fields, your loan approval process may get delayed. To avoid any delay or confusion, you can fill the form properly.
How to Improve Your Chances of Getting a Personal Loan?
If you want to make sure that your personal loan application is accepted, then you can use the following important guidelines.
- Be aware of your credit score: When you plan to apply for a personal loan, you need to be fully aware of your credit score. Only after you have these details, it makes sense to apply for a loan. You should decide your lender and your loan amount as per your credit score. If your credit score is pretty low, you can work on improving it within a specific period and then apply for a loan. This will ensure that you do get your loan approved. If you have made any late payment for your previous loans or credit card bills, then you can try waiting for a few months. You can apply for a new loan after this gap.
- Select your lender as per your credit score:Each lender responds to different credit scores differently. According to your credit score, you can decide a suitable lender that will offer customized loans to you as per your specific needs. Conventional banks and NBFCs may not offer personal loans if you have a pretty low credit score. In such cases, you can approach the new-age lenders who may agree to provide you with a loan with certain terms and conditions.
- Make sure you check your debt-to-income ratio properly:The loan amount that you apply for and the income that you earn on a monthly or annual basis should be proportionate. Your debt amount and income should match each other properly. If you apply for a personal loan quantum which is much higher than your monthly income, then your application may not get accepted. Hence, you should choose your loan amount very sensibly to make certain that you do get the loan.
Do’s and Don’ts While Taking a Personal Loan
Do proper research before you apply for a personal loan: Make sure you do good research regarding the various interest rates and prepayment charges implemented by the Reserve Bank of India (RBI) for multiple loans? You will also have to keep yourself updated about modifications made to these charges. Banks tend to change their decisions about fees and interest rates on a regular basis. It is important for you to be aware of these aspects so that you do not get scammed while taking a personal loan.
You will need to do relevant homework about the numerous loan amounts, loan tenures, and loan rates of different banks. When you do your homework sincerely, you will be able to grab a great loan deal that offers a low-interest rate along with meeting your other preferences.
Moreover, when you spend some time on research, you will get to know about new personal loan schemes or special offers on certain schemes. You can save a lot by making use of these offers. You may also be required to pay very low processing fees when you make use of these special loan deals.
Do read the fine print carefully: When you take a personal loan from a bank or NBFC, make sure you read the fine print of your personal loan document cautiously. You should be aware of all the terms and conditions associated with your personal loan. If you find any discrepancies with your loan details, you should immediately ask your lender for clarification. This will avoid any unnecessary confusion later. Take some additional time to read the material written in tiny fonts so that you do not have any problem in the future. If you want, you can take the help of any professional financial consultant to clearly understand your loan terms and conditions.
Do save your money carefully when you are repaying: You may typically take a few years to repay your personal loan completely. During this situation, it is important that you keep aside a part of your funds for emergency purposes and other needs. If you solely focus on clearing your debt without saving anything, you may get yourself into deep trouble. Hence, you should allocate a part of your funds for saving exclusively. This will help you be prepared for your urgent financial needs even during your loan repayment period.
Do pay your loan installment promptly every single time: When you are repaying through monthly installments, you should make certain that you pay each installment amount on time. You should focus on not missing any of your payment deadlines. If you miss any of your payment deadlines, you will unnecessarily have to pay a late payment charge. You may also be treated as a borrower who has defaulted his or her loan. This can affect your credit score negatively. You will need to make the full payment within the timeline assigned for your loan repayment. If you miss even one installment, you will have a negative symbol against your loan account. Hence, push yourself to make the payment on time.
In case you are struggling to repay your loan during any particular month, you can priorities your various payments. You can forego certain expenditures to avoid unrequired additional payments. You can then create a plan to first pay your loan EMI for that certain month and then you’re other bills or payments. When you give first priority to your loan EMIs, you can avoid a negative mark on your credit report and credit score.
Do evaluate your credit score thoroughly: Before you even approach a bank for a personal loan, check your credit score thoroughly. When you are aware of your credit score, you can assess the probability whether your loan will get approved or not. Your credit score also plays a significant role in determining the interest rate for your personal loan. You can check your credit score by using the credit score calculator available on the web portal of FinFico. It offers an accurate credit score for free! You only have to key in certain relevant details and you will get your results instantly. The Credit Information Bureau (India) Limited (CIBIL) provides a credit score to an individual only if he or she has taken a credit card or a loan previously.
Do apply for an affordable loan amount: You should make sure that you choose your loan amount only after careful thinking. You should check out the various loan rates and loan fees and also you’re other expenses. Accordingly, you should apply for a particular loan quantum. Do not go overboard while applying for a loan because you should remember that you will only have to repay this entire loan amount. Hence, be watchful about how much you apply for.
Do have a clear picture of what you need the loan for: Do not take a loan just because you can get it easily. Before you apply for a personal loan, you should be fully clear about why you require it. Once you procure the loan from your bank or any other lender, you should stick to the purpose that you had in mind. You do not have to mention the purpose to your lender. However, you will need to stick to it when you are repaying your loan.
Do not sign your loan documents without understanding every point: You should avoid signing your loan document without comprehending each point. You must read all the terms and conditions given in your loan document before you agree to sign it. If you have any doubt regarding the features of your loan, you will have to immediately contact your bank representative for assistance. It is better to get everything clarified before you sign the document. Once you sign the loan document, the bank may not agree to make any changes even if you do face any issue later.
Do not make several inquiries regarding various personal loans: Make sure you approach a certain bank or NBFC only after you do excellent research. You can shortlist different banks after checking to see what they have to offer. Avoid shopping around for new personal loans or personal loan refinancing options without finalizing on a few options. If you approach numerous lenders to apply for a loan, there will be a record of excessive credit inquiries in your name. This can affect your credit report poorly. Your credit score can also get impacted.
Do not take a personal loan without any serious purpose: It makes sense to apply for a personal loan for making wedding arrangements or for funding your higher education course or for renovating your living space. However, stay away from taking a personal loan for frivolous purposes such as hosting parties, having fancy dinners, or vacationing at some exotic location. When you take a personal loan for such reasons, you may end up getting into trouble. You will end up paying extremely high bills for these purposes with your personal loan and then you may struggle to repay the loan.
Do not be in a hurry to end your loan comparison process: A few lenders may force you to finalize on a particular loan product without giving you time to compare other loans or to read your loan terms and conditions. You should avoid getting pressurized by such lenders. You can take proper time to check out various loan options and compare the different features of each loan option. Accordingly, you can finalize on one. If your lender does not encourage you to compare other options, you will need to be wary about this lender. Such lenders may have a few other intentions to cheat you by taking your money.
Do not forget to pay your loan installments: This tip may seem a little too obvious. However, you should make sure that you never ever miss your payment deadline. If you are clearing your loan through EMIs, you will have to be ready with your amount every month without fail. If you miss paying even one installment, your credit score can get harmed and then your creditworthiness will come down each time you fail to pay. Moreover, you will be asked to pay a heavy penalty whenever you delay any bill payment. Apart from your regular repayments, you will be forced to pay additional heavy amounts as a fine. You can avoid this unnecessary headache by just being a little conscious to pay your EMIs promptly.
Do not accept bad personal loan products: Avoid bad decisions regarding personal loan products. There are multiple types of personal loans available in the market. Hence, you will have to be financially sensible while choosing them. The common personal loans will help you enhance your financial wealth and assist you in attaining your financial goals. However, there are a few bad personal loan options such as payday loans or title loans. These loans require you to pay heavy penalties and they also do not allow you to redeem conveniently.
You can typically stay away from short-term personal loans that will make you pay high-interest rates. You will end up incurring higher expenses compared to the original amount that you would have borrowed.
When Should I Choose a Personal Loan?
- When you have urgent financial requirements: You can go for a personal loan when you are in need of money quickly. Whenever you have a financial emergency, you can choose a reliable personal loan to meet your requirements conveniently. A personal loan is generally approved and disbursed very quickly.
- When you want very minimal documentation: The documentation process is also minimal for personal loans. Hence, if you do not have the time to make arrangements for other documents, you can choose a personal loan instead. For other secured loans, you will be required to furnish documents regarding the title deed of the asset, etc. It will take time for you to arrange these documents. If you want to use the funds from a loan for multiple purposes, you can go for a personal loan. You will not have to mention the purpose of your personal loan to your lender. Hence, you do not need to get any supporting documentation for this type of loan.
- When you want to consolidate your debts: You can also go for a personal loan if you are planning to consolidate your debts. You can combine your multiple debts into a single personal loan account and clear your debts together. You can also choose a personal loan for a balance transfer. You can clear your credit card bills with a personal loan. Your interest rates will be lower compared to your personal loan. It is financially sensible to clear off a high-interest debt by taking a low-interest debt.
- When you do not want to hand over any asset to a lender: If you go for any other loan, it will mostly be secured in nature. Hence, if you are not interested in putting any of your assets at risk in the form of a collateral, then you should ideally select a personal loan.
- When you can’t make any other financial arrangement for hospitalization expenses: If you cannot arrange money instantly from other sources for hospitalization bills, you can apply for a personal loan and make sure the treatment is done properly.
My Credit Score is Below 700. Will I Get a Personal Loan?
- When you apply for a personal loan, there is no exact assurance that you will receive a loan even if your credit score is high. However, it is more likely that you will get a loan if your score is 700 or above.
- When your score is below 700, you may most likely not qualify for a loan. However, you can try taking alternative steps to somehow get a loan. You could show your income proof to show that you earn a high income currently and that you will be able to repay the loan on time. You could also offer collateral or a security to your lender to assure that you will repay your loan promptly. The lender will seize your asset if you fail to pay your loan on time. You could also discuss with your lender that you are implementing appropriate steps in order to bring up your credit score.
- Alternatively, you could take some time to enhance your credit score and then apply for a personal loan. You can follow some strict measures until your credit score goes up and then apply for a loan. This will prevent any form of loan rejection and it will also help you avoid too many credit inquiries. Once your credit score is 750, you can just stick to a good schedule of repaying all your installments on time.
What are the Other Factors That Influence Approval for a Personal Loan, Apart from Credit History?
When you apply for a personal loan, your lender will check other factors apart from your credit history. These factors include your income, your employment status, your previous payment records, etc.
If you show that you have a good income, your loan application will receive a positive result. If you have a regular flow of income each month, then your lender will be satisfied. The lender will check your documents regarding your employment and your income. If you have moved jobs quite regularly, your loan application may not get approved instantly. This is because your lender will assume that you will not be earning a steady income and that you may struggle to clear your debts. Hence, you can try applying for a personal loan only after you have been with a company for a long period. However, if you are in need of funds urgently, you can go ahead and apply for your loan.
What Factors Affect the Interest Rate on Personal Loans?
- Your income: If you are earning a pretty high income with excellent job stability, your lender will believe that you have a good repayment ability. Hence, if you meet your bank’s income eligibility criteria, your interest rate will be good. You can negotiate with your lender for a good interest rate by giving proper documents to prove your income. The lender will then rely on your capability to repay each installment on time. If you have been shifting from one job to another for a long period, your income flow will get affected and this can affect your interest rate for loans also.
- Your credit history and credit score: One of the most important factors that has an impact on your personal loan interest rate is your credit score. It is ascertained according to your credit history. If you have previously taken a loan or a credit card in your name, you will be given a credit score as per your repayment behavior. If you have repaid your previous credits within the prescribed time limit, your credit score will be good. CIBIL will evaluate your payment ability and create a credit report and provide you with a credit score. In India, a positive credit score is usually above 750. It ranges from 300 to 900 and 300 is the lowest credit score and 900 is the best credit score.
- Your relationship with your lender: If you maintain a good relationship with your bank or NBFC that is offering a personal loan to you, you will be able to procure a good interest rate. If you have opened a savings bank account or a fixed deposit with a bank already, you would have established loyalty with this bank. When you approach the same bank for a personal loan, it is highly likely for you to get a good interest rate. The bank would not want to miss having you as a borrower for a loan and hence, the bank will agree to provide you with an attractive interest rate. To prevent you from going to a competitor bank, your present bank will agree to give you a competitive interest rate for your personal loan.
- Your employer’s reputation or goodwill: If you are working in a well-established company when you apply for a personal loan, you will be able to obtain a great interest rate for your personal loan. On the other hand, if you are employed with a new start-up or a pretty unstable company, you may not be able to get an attractive interest rate. Generally, lenders assume that big and well-established companies provide a steady career to their employees. Hence, they prefer employees with a regular flow of income. Therefore, if your organization is well-renowned and famous, your interest rate will be low.
Apart from these above-mentioned points that are associated with a person’s ability to repay, there are certain external factors that play an important role in determining a loan interest rate. These factors include inflation, changes in government policies, etc. If the government modifies any monetary policy according to the changes in the financial environment, then your interest rates can change. Also, when there is an increase in inflation, your loan interest rates can increase.
What are the Advantages and Disadvantages of Personal Loans?
- Unsecured in nature: A personal loan is unsecured in nature wherein you do not have to provide any collateral or security while applying for the loan. You only need to assure your lender that you will pay the loan installments on time. Then, your lender will sanction your loan and get it processed.
- Easily accessible: Personal loans are always easily accessible in different parts of the country. Almost every bank and NBFC offers personal loans with simple documentation at affordable prices. You do not have to mention the reason for applying for the loan and you can obtain it from the bank quickly.
- Minimal documentation process: When you apply for a personal loan, you do not have to fret about arranging numerous documents for the approval. You will have to furnish only your basic documents while applying for the loan and you are good to go. You will not be asked to provide any asset as security and hence, you do not have to give any title or verification for the assets.
- No middlemen: When you are applying for a personal loan, you do not have to worry about getting in touch with a middleman. Getting a loan with the help of a middleman or an agent can delay your loan application process. You will also be forced to pay high brokerage fees when you need the help of a middleman. For a personal loan, you can directly go to a bank or a non-banking financial corporation and start the application process.
- Can be used for any purpose: Your personal loan can be utilized to fund any requirement. You can finance your home renovation, your higher education course, your wedding, your medical expenses, etc. You will not have to specify the purpose of obtaining this loan to your lender. You can decide what you want to do with your funds. However, it is very important that you are clear about how you want to utilize your funds before receiving the money.
- Quick processing of loan: When you apply for a personal loan, it will get processed and approved very quickly. This is because it does not need any security or guarantee.
- Special offers and schemes: Since personal loans are one of the most popular categories of loans, banks and NBFCs release many exclusive offers while providing personal loans. You can also enjoy special schemes for personal loans given by certain lenders. A few professionals such as accountants, lawyers, and doctors get special personal loan offers.
- High-interest rate: Personal loans are generally economical. However, since you do not offer any asset as a security or collateral to your lender, your lender may charge a high-interest rate. Personal loan interest rates are higher when compared to other secured loan interest rates such as home loans, car loans, etc.
- Credit history: If you are interested in a personal loan, you should make sure that you have maintained a good credit history. Otherwise, your personal loan application may get denied. To avoid rejection of your loan, you will need to make sure that you have a decent credit history before you apply for a loan. You should work hard to prevent any form of default of payments. You could try applying for a personal loan from a bank with which you already have a savings account or a fixed deposit. This way, you would have established a good relationship with your banker and hence, it will be easy to get a loan from the same banker.
- No option to pay the loan in parts: Sometimes, when you take a personal loan from certain bankers or NBFCs, you may not be allowed to pay your loan in parts. You may be asked to pay your full loan amount in one go for the full loan tenure. In the beginning of your loan tenure, your payments will mainly comprise the interest and this will result in high expenses.
- Bad loans for people with low credit rating: Certain people with low credit scores may somehow get a loan from certain lenders. However, these lenders may charge extremely high interest rates and offer very low principal amounts.
How do I Choose the Best Personal Loan Offer?
When you are looking for a personal loan, you are most likely having financial limitations. Hence, you need to be very careful while choosing a personal loan option. You need to consider a few aspects of personal loan options when you want to pick one. The factors include EMIs, loan interest rates, processing fee, documentation, prepayment fee, time taken to approve and disburse the loan, responsiveness to alteration in interest rates after policy changes made by the RBI, and eligibility criteria laid by your lender.
You can compare multiple loan options by keeping these above-mentioned points in mind and you can accordingly select any product.
Personal Loans for NRI
In India, banks and NBFCs offer exclusive personal loans for non-resident Indians (NRIs) according to their specific preferences and needs. You can apply for the loan by visiting a bank branch in India or by going to the official website of the bank. Many banks offer personal loans against fixed deposits. Some banks may require the applicant to be a resident Indian and the co-applicant can be the NRI who is a close relative of the applicant.
The documentation process for NRIs is also minimal and simple. You will need to furnish certain relevant documents such as your visa, passport, salary certificate, and bank statements from both domestic and foreign banks. Generally, the personal loan tenure for NRIs is up to 36 months.
Personal Loan Balance Transfer
Many banks offer the personal loan balance transfer facility that help you in minimizing the burden of your current loan. You can transfer the balance of your existing loan to a new personal loan account and then get additional finances for your other needs. This facility will help you secure a low interest rate.
- Under this facility, the unpaid principal amount is transferred to another account. This facility is easily accessible if you have not defaulted any of your EMIs.
- Apart from reduced interest rates, you can also enjoy longer loan tenures. You may have to pay a small amount as a balance transfer fee to your lender. This depends on the bank or the NBFC that you have chosen.
- You may also go for a loan balance transfer if your current lender is not offering satisfactory services.
- When you go for a balance transfer, you should make certain that you go for a loan that costs lesser than your current one.
- Also, if your present bank fails to meet certain conditions that were negotiated earlier, then you can go for a loan transfer.
- Moreover, you can get a top-up loan facility to get more funds for your other requirements.
- While comparing balance transfer options, you should take into account the change in EMIs. The new financial institution may offer lower EMIs when you go for the balance transfer. However, in such cases, the interest may increase very drastically. Hence, you should be very cautious when you choose your new lender.
- Next, you should consider the processing fee for your new balance transfer facility. It should be lesser than what you are paying for your present loan product. You should also check the legal fees, technical fees, administrative fees, valuation fees, etc. when you pick a balance transfer option.
- You should be wary about the special offers provided for loan balance transfers. Nowadays, lenders offer exclusive discounts on loan transfers. Before you go for any of these offers, make sure you read the details regarding the offer very carefully.
- You will also need to read the terms and conditions regarding your new personal loan balance transfer program.
- You will have to make sure you collect all the documents that you had given to your present lender and give them to your new lender.
If you are asked to give collateral for your loan transfer, make certain that you give collateral for a lower value than your original collateral
How to Get a Personal Loan for Low CIBIL
When you have a low CIBIL score, if you approach a bank or an NBFC for a personal loan, your application may not get approved very easily. Hence, you will have to take alternative measures to prove to your lender that you will be able to repay your loan on time. When you have a low CIBIL score, your lender will automatically assume that you will struggle to repay the loan and hence, may reject your application. You can use the following guidelines to make your lender believe in you and get your loan application approved:
- Show income proofs to your lender: If you have recently got a salary increment or a better job offer with a good pay hike, then you can show relevant documents to your lender to give proof. When your lender is aware that you are earning better now and that you will not struggle to repay, your lender will accept your application. Meanwhile, you can work on improving your credit score by following stringent measures to clear all your debts quickly.
- Check out peer-to-peer lending: Peer-to-peer lending is not a mainstream form of lending. However, when banks and leading NBFCs are not ready to offer a loan to your due to your CIBIL score, you can shift to peer-to-peer lenders. You may have to pay very high interest rates for such loans. However, since you have no other option, you may have to go for these loan products.
- Take help from your spouse or family member: If your spouse or any other close family member has a better credit score than you, then you can take his or her support to apply for a personal loan. You may also make your spouse to be your joint applicant. Or you can ask your spouse to apply for the loan and you can be the co-applicant.
- Take a secured personal loan: Personal loans are usually unsecured loans. However, if you have a low CIBIL score, you can discuss with your lender and decide to go for a secured personal loan. You can offer any valuable asset as collateral. In this case, your lender will be ready to ignore your credit report. You can give FDs, assets, shares, or gold as your collateral.
- You can find out about certain NBFCs that offer personal loans in spite of low credit score: Most banks are very strict about applicants meeting eligibility criteria related to credit score. Hence, you can do proper research to find a reliable NBFC that will agree to offer a personal loan in spite of your credit score. You may be required to pay a high interest rate though.
How to Choose Personal Loan Tenure Wisely
When you want to select your personal loan tenure, you will need to consider your interest rate and your EMI amounts. You need to remember that if you go for longer loan tenure, your EMIs will be lesser. This way, you will incur less expense for your personal loan. However, you also need to bear in mind that you will be paying higher interest if you choose a loan for a longer tenure.
You can calculate your EMIs by using a personal loan calculator which is available online. Many third-party websites and official websites of banks have an advanced EMI calculator. You can check out the EMI calculator offered by FinFico.com. After computing your EMIs for different loan tenures, you will get an idea about how much you will spend each year. Accordingly, you can choose your loan tenure.
You should also consider your prepayment terms. When you are sure that you will be prepaying your loan, you can enter these details in the EMI calculator. You will get accurate results accordingly. You will most likely be asked to pay a prepayment penalty when you go ahead. If you want to prepay your loan within 1 or 2 years, you can go for a longer loan period so that your monthly payments will be lesser.
Personal loan is an unsecured loan that is given without any security. The end use of the money is not monitored either.
You can take a personal loan to meet any personal financial requirement or to repay your credit card bill, to buy electronic items, to take a vacation or to even meet the expenses of a wedding or any other function
A salaried individual, self-employed professionals and self-employed non-professionals can apply for a personal loan
Most banks will provide personal loan for a minimum of 1 year
Most banks will provide personal loan for a maximum of 6 years
The minimum age of the applicant must be not less than 21 years and the maximum age of the applicant at loan maturity must be 65 years.
Yes, usually the banks charge a processing fee of 2-3 percent on the loan amount. You can however negotiate with the bank to reduce the fee.
Personal loan can be repaid in equal monthly installments or EMI. You can provide a post-dated cheque or can give a standing order with your bank or through electronic transfer.
EMI or Equal Monthly Installment includes principal and interest
Personal loans can be prepaid in parts or fully at any stage. Some banks might charge a prepayment penalty whereas some banks will not. Some banks will not allow the part-prepayment. So, check all the documents before finalizing with the bank.
No, you will not need a guarantor to take a personal loan.
Yes, you can club the income of your spouse to boost your eligibility to avail a personal loan.
The banks do not usually let you take a loan exceeding 30- 40 percent of your net salary.
Generally, the minimum amount limit that one can take a personal loan is Rs.50000
Generally, the maximum loan limit is Rs.15 lakhs.
No, you don’t have to provide any security or collateral to take a personal loan.
Yes, you have the option to choose either the fixed or floating rate of interest.
The interest rate varies from banks to banks and it is within 14-26 percent depending on your profile and the scheme that you opt for.
Banks disburse the loan within 72 hours to 7 working days provided all the documents are in place.
Yes, the CIBIL score affects the interest rate offered to you. If your CIBIL score is high and if you have a good repayment history, then the bank will offer you a lower interest rate.
If you have been a customer for a particular bank for a while, then the bank might reduce the personal loan interest rate or other such charges. Some banks will also provide you additional services.
Yes, banks refer your CIBIL score and credit report and the minimum CIBIL score requirement is 700+.
Yes FinFico.com personal loan calculator tool is totally free and the portal does not charge any fee for its services from members.
You need to submit an identity proof as well as residence proof, your latest salary slip, form no. 16, last 6 months bank statement and a passport sized photograph that is to be affixed on the application form.
If you don’t have a bank account with the bank, it is not mandatory to apply for one. But, if you apply for a loan with your existing banker, then you will be eligible for a relationship discount.
Some banks let you register yourself for ‘Do Not Disturb’. The executives will not disturb you with cold sales calls.
The best way to apply for a personal loan is by using the online loan application tool at FinFico.com. The tool can be accessed on this page allowing users to choose personal loan from various banks and NBFCS as per their selection.
Various banks and NBFC’s offer personal loans ranging from a minimum amount of Rs. 1000 to a maximum amount of Rs. 15 to Rs. 20 Lakhs. The maximum and minimum loan amount depends on the underlying bank as well as the personal financial details of the loan seeker.
Various banks offer different tenure for personal loans. The most common tenure period offered by majority of banks and NBFCs ranges between 12 to 60 months.
Presently FinFico.com offers its loan applicants an active tracking tool through voice. In future, both email and SMS allowing them to track daily updates of their loan application. We work for that.
FinFico.com is Tamilnadu’s premier financial market place and takes utmost care in ensuring the all data is sent in electronic form with high level of encryption. FinFico.com does not share data with any third party other than the financial institution.