Personal Loans are usually of two types i.e. secured personal loan which is secured against the mortgage of securities, high surrender value insurance policies, gold, etc and another is unsecured personal loan which does not require you to mortgage anything.
Unsecured personal loans do not require you to provide any collateral security, though some PSU banks may insist on a third party guarantee. Unsecured personal loan can be taken to finance any short-term requirement like oversea trips, marriage, medical emergencies, etc. The only condition is that the personal loan should not be used for speculative purposes.
Personal loan is a simple hassle free process of funding your personal requirement with minimal documentation and within quick time. In India, Banks as well as Non Banking Financial Corporation (NBFC) finance personal loan.
Purpose of Personal Loan
Personal Loan is commonly known as all purpose loan it can be uses for fulfilling various legitimate personal needs that includes:-
- Higher education for self, children, etc.
- Marriage in the family
- Dream vacation
- Festival expenses
- Medical emergencies
- Furnishing or renovation of house
- Purchase of high end consumer goods
- Purchasing of high end lifestyle products.
Personal Loan Eligibility Criteria
Being unsecured in nature, lenders have stricter norms regarding eligibility and sanctioning of personal loan. But some of the basic eligibility criteria the applicant must fulfill are:
- Should be a Resident Indian
- Should be minimum 21 years of age
- Should be Salaried or Self Employed Professional / Non professional
- Should be a permanent employee of the organization, if salaried
- Should have continuous source of income to service the loan
Rate of Interest and Loan Amount
The rate of interest is primarily dependent on:-
- Company for which the prospective borrower is working
- Credit history of the borrower.
The bank may reject the personal loan if the borrower has defaulted on his past dues on any credit card or loans.
The maximum loan amount is dependent on prospective borrower’s income and his ability to service the loan and can go up as high as Rs. 30 lakhs. The final loan amount is dependent on host of other factors like regular fixed expenses, existing loan repayment, etc.
EMI and Repayment
Most lenders will require borrower to repay the loan within a period of 12 to 60 months maximum. The borrower can repay the loan by paying regular monthly installments also known as Emi or Equated Monthly installments.
Fees and Charges
Processing fees varies from lender to lender and will be in the range of 0.5% to 3% (excl. service tax) of loan amount. Generally the processing fee for personal loan is not taken upfront, but is deducted from the loan amount disbursed by the lender.
If the personal loan is availed on floating rate of interest the borrower need not pay penalty for early closure of loan but may end up paying penalty if the loan is on fixed rate of interest.
To start the loan process, the lender will require:-
Application Form with photograph
KYC Documents –
- Proof of Identity – PAN / Passport / Driver’s License / Voter ID card / Aadhaar card, etc.) and
- Proof of Address – Passport / Aadhaar card / Landline Telephone Bill / Electricity Bill, Ration Card, etc.)
A/c. Statement –
- Statement of bank account for the last six months
- If any previous loan, then Loan A/c. Statement for last 1 year
For salaried individuals:
- Form 16 or IT returns – last 2 years
- Salary slips for last 3 months
- IT returns – last 2 / 3 years
- Audited Balance Sheet & Profit & loss A/c – last 3 years
- Proof of turnover vide latest sales / service tax returns
- Proof of continuity of business (Trade License /Establishment /Sales Tax certificate)
- Office address proof
- Qualification or registration proof required for Self-employed Professionals
Documentary proofs required may vary from customer to customer and the financial institute may ask for more documents, if required.
Guarantor / Collaterals
Nowadays, most lenders do not ask for any kind of guarantor or collateral, though some of the PSU banks may insist on some kind of third party guarantee.
Personal Loan Service Providers
It is always advisable to firstly approach the bank where you have an account for a long time. It is easier to get unsecured personal loan from the bank where you have existing relationship or salary account.
But also remember to get in touch with as many lenders as possible and get them to make loan offers to you. Once that is done, you can negotiate with the lender for the interest rate and select the most cost effective option. You should also consider the processing fee and prepayment charges while finalizing the lender.
Some of the major players in the personal loan segment are HDFC Bank, Citibank, Standard Chartered Bank, Fullerton India, Bajaj Finserv, State Bank of India (SBI), etc.
Always remember that personal loan should be taken only in case of extreme urgency of funds. Being unsecured loans in nature, the personal loan is usually more expensive in terms of interest rate compare to any other loan taken against collateral security like gold jewelry, high surrender value insurance policies, etc.