Personal Loan: A Complete Guide

Personal loans are one of the most important financial tools which are offered by banks and non-banking financial companies (NBFCs). It is an unsecured loan which can be used for any purpose. A number of things are taken into consideration before providing a personal loan to an individual such as his/her income, the repayment capacity, the credit score and history, and so on.

Advantages of personal loans:

There are a number of advantages for personal loans. Some of these advantages can be summed up as follows:

  • Flexible in nature: The best part about personal loans is the flexibility that they offer. The loan can be used by the applicant for any purpose that he/she wants. There are no bindings in regard to the spending of the loan amount. Thus, it is one of the most preferred financial tools that is used by individuals to meet unexpected expenses.
  • Processing: Personal loans are usually processed very fast. That also makes it a hassle-free process. In most cases, the personal loans are granted to an individual on the basis of his or her credit history and loan repayment capability. In addition to that, a lot of paperwork is also not required at the time of applying for a personal loan. It also becomes easier for an individual to get a loan from the bank if he or she is already an existing customer of the bank.
  • Building a good credit portfolio: Personal loans help in building up a good credit history within a short period of time. Maintaining a healthy credit portfolio also helps in increasing the credit limit of an individual. However, it is important to manage the loan properly.

Eligibility criteria for personal loans

The eligibility criteria for personal loans vary from one bank to another. However, in general, the following things are taken into consideration:

  • The age of the applicant,
  • The occupation of the applicant,
  • The monthly income limit of the applicant (Rs.12,000 in semi-urban areas and Rs.15,000 in metros),
  • The area where the applicant resides, and
  • The loan repayment capacity of the applicant.

In addition to the points mentioned above, the applicant will also be required to have a steady source of regular income. This income source can be from salary, or the applicant can even be a self-employed person or a professional. In case of salaried individuals, the eligibility is also dependent on the company he or she is working for, his or her credit history, and so on.

Applying for a personal loan

Applying for a personal loan is not a huge deal. It is quite an easy task, however, getting the application approved for the loan is what an individual should be bothered about. As mentioned earlier, there are certain criteria for the eligibility and these need to be fulfilled in order to get a loan application approved. The person will be required to submit his or her KYC documents along with his or her proof of employment, salary slips, and so on.

After the submission of the necessary documents, a credit history check is performed to know the credit score and the credit history of the individual. If the bank finds the individual to be eligible for the loan, the loan will be sanctioned.

Documents required at the time of applying for a personal loan

The requirement of documents is different for different financial institutions. However, in general, an applicant will be required to submit the following documents at the time of applying for a personal loan:

  • Proof of income (recently acknowledged ITR for self-employed individual and salary slips for salaried individuals)
  • Proof of identity (photo ID cards such as driving license, Aadhaar card, election commission card, and so on)
  • Proof of address
  • Certified copy of license (in case of self-employed individuals)

Duration of a personal loan

The duration of a personal loan can be anywhere between 12 months and 60 months. This is general tenure which is applicable for personal loans. However, a shorter or a longer tenure might also be allowed for an individual on the basis of certain factors.

Factors to be taken into consideration before applying for a personal loan

Although personal loans are one of the best credit instruments that can be used at times of insufficiency, it should be taken care of that the debt amount does not go beyond an individual’s repaying capacity. In such cases, an individual might end up in serious debts and also be affected by all other troubles in regard to the debts. The following factors should be taken into consideration before an individual applies for a personal loan:

  • Assessing the total cost of the loan: This is one of the primary factors which should be checked before applying for a personal loan. The interest amount is not the only amount which is associated with a loan. A loan will also engage a number of other charges and fees and the final cost of the loan should be considered only after taking all these charges into consideration. This calculation will provide a better and clearer picture of the loan to the applicant and he or she can manage his or her finances accordingly to avoid defaults on the repayment of the loan.
  • Rate of interest: Since personal loans are unsecured credits offered by the banks, the rate of interest is usually high for the loan amount. In most cases, the interest rates may be as high as 11.49% to 25% p.a. It is also important to note if the rate of interest is a reducing balance interest rate or a fixed interest rate as these rates will have an important role to play in the determination of the EMI amount.
  • Calculation of EMI: There are a number of third-party websites and bank websites that offer the facility of an EMI calculator. An individual can easily calculate the exact amount of the EMIs by entering the basic details in regard to a loan. It is important to find out the exact EMI amount beforehand in order to avoid penalties due to non-payment of dues.
  • Tenure of repayment of the loan: The tenure for repayment of the loan should be chosen very carefully. In most cases, the tenure is limited up to 60 months. However, the period will be determined on the basis of the amount of the loan and the capability of the applicant to repay the same. The applicant will also be able to choose the tenure for the repayment. The shorter the tenure is, the higher will be the EMI amounts and vice versa. However, the total amount paid as interest will be lower in case of shorter repayment tenures.