Personal Loan

A personal loan is an unsecured loan that can take care of your sudden financial needs or emergencies even if you do not have any security to pledge.

Personal loans are sanctioned basis the individual’s credentials only where lending institutions look at the applicant’s CIBIL history and financial stability.

Since it is not backed by any collateral or security, it usually comes at a higher rate of interest.

Also, it is one of the easiest loans to process with minimum paperwork as it can be processed only based on CIBIL report, KYC and income documents.

Personal Loans can be availed for either of the following purposes.

• Going on a vacation.
• Starting a business.
• Wedding Expenses.
• Medical Emergencies.
• Higher Education.
• Repairs, renovation or extension of existing house.
• Transfer of loan balance from one bank to another bank and many more

 

PRODUCT VARIANTS

The following are some of the most popular variants of PERSONAL LOANS.

1. Regular Term Loan – “Term Loan” is the regular LAP product where you are expected to make minimum EMI payments regularly for a specified period at a specified rate.

Assuming, the remains unchanged and no prepayments done at all, the loan continues until the end of the tenure.

On the payment of the last installment and clearing all pending dues, the loan stands closed.

 

2. Flexi Loan – ​“Flexi Loan” is a pre-sanctioned credit line given to borrowers.

From the sanctioned limit, borrowers can withdraw money instantly as and when needed and prepay the same anytime without penalties.

It gives them the flexibility of servicing only on the amount withdrawn from the total limit hence, it keeps their obligation low as compared to a regular personal loan.

The best part about this product is that the is charged on a daily basis. This gives borrowers an additional comfort to borrow even for few days without any loss of interest.

All these features make this product very reliable during emergencies.

 

3. Balance Transfer – The process of transferring a loan from one bank to another for various reasons like restructuring, reducing EMI or availing better interest rate, etc. is known as “Balance Transfer”.

 

 

ELIGIBILITY CRITERIA FOR PERSONAL LOAN

All lending institutions have their defined set of eligibility criteria that they follow while sanctioning loans.

These criteria are supposed to be in line with the bank’s internal policies and regulatory guidelines.

Also, they differ from one institution to another. The following are some of the common eligibility criteria that most banks follow.

1. Age – The applicant should be between 21 - 55 years of age.

 

2. Income – Net monthly income should be more than Rs. 20,000/-.

 

3. Location – Either the workplace or the place of residence should be located in the city where the loan application is made.

 

4. Employer type – Most lenders do not provide personal loans to individuals who are employed with companies other than “Pvt Ltd” or “MNC”.

 

5. Property Ownership Status – Either an office or a house should be owned by an applicant.

 

6. Citizenship – An applicant should be a resident Indian.

 

7. CIBIL Score and repayment history – CIBIL records should not reflect defaults on any loan repayments in the past. Also, the minimum CIBIL score should be 700.

 

8. Financial and job Stability – Changing jobs too frequently, filing 2 years ITR in the same year just before applying for a loan, delay in salary payments, a gap in employment, cash income, etc. display instability and may lead to rejection of your loan application. Also, an applicant should be a confirmed employee and in case he/she has changed the job, they should have received at least one salary credit from the new employer to avail the loan.

 

10. Income / Repaying Capacity – Most banks will accept the maximum of 70% of your net monthly income as your total loan repaying capacity.

It also includes all existing s that you are currently paying towards other loans. Hence, having too many loans with high payments can reduce your overall loan eligibility to zero.

 

A PIECE OF ADVICE THAT YOU MUST CONSIDER WHILE TAKING A PERSONAL LOAN

The following are some of the suggestions that every PERSONAL LOAN borrower can consider to protect the value of their investment.

THINGS YOU MUST DO

1. Know your eligibility – Get your overall income eligibility checked before running a CIBIL inquiry and incurring expenses on processing fees.

Many times banks send you intimation for rejection of loan after incurring all the expenses for obvious reasons that could have been known earlier.

 

2. Always choose your tenure wisely – Personal loan involves prepayment penalties. Hence do a careful evaluation of your current and future cash flow requirements and choose the loan tenure accordingly at the time of making an application.

Opting for higher tenure will lead to higher loss of interest and penalties for making prepayments.

Likewise, opting for a lower tenure will attract higher EMI and can result in the choking of cash flow.

 

3. Always opt for automatic payments – In this computer age, many borrowers still believe that physically walking into the bank and depositing their EMI cheque every month is the ideal way of servicing the loan and keeping their payments regular.

Such borrowers should understand the benefits of “Electronic clearing service” (ECS) where their is deducted automatically from their bank account each month.

This is not only convenient but also a much safer and a foolproof method of keeping your payments regular.

Any missed payment can result in penal interest, late charges and negative credit reporting which can have long term implications.

To sign up, one needs to submit a duly filled and signed NACH mandate in case they have a bank account with the bank other than the loan provider and “Standing Instruction Form” if the savings account is with the same bank as their loan.

 

4. Compare terms with other lenders – Compare interest rate, processing fees, prepayment penalty and products of other lenders before signing the application form.

 

5. Always pay the missed EMI in the same month – Sometimes borrowers miss their EMI payment in a particular month due to unavoidable circumstances and genuine problems.

The borrower in this situation need not panic. Every bank understands that every missed is not out of wrong intent.

Ensure you make the payment before the end of the month as banks usually do credit reporting only 30 days after the payment due date. The late fee however could be charged but it will not have long term implications on the borrower.

 

6. Get expert advice from the mind your savings team – Dealing with banks directly can be misguiding many times due to a narrow approach. The bank employee you are dealing with may not be an expert in this subject.

 

Also, it can get very confusing for a loan applicant to decide as every banker will talk about the products and benefits that their bank is offering.

 

Hence, one should always look for fair advice and suggestions from the aggregators or agents who deal with multiple banks and have good knowledge about the domain.

 

They are the experts in this field and are in a much better position to share insights that can help you make an informed decision.

 

7. Always repay the personal loan after credit card dues – After credit cards, personal loans carry the highest rate of interest.

Hence, personal loan balance should be repaid before any other loans except credit card dues.

 

 

THINGS YOU MUST AVOID DOING

1. Don’t put an application with multiple banks – Every bank report loan inquiries to credit bureaus. Hence, making multiple applications with different banks may not only raise questions for doing so and impact your credit rating but may also cost you more on processing charges.

 

2. Prefer borrowing from banks with a good market reputation – Applicants with a sound profile and good credit history are mostly eligible to avail loan from any institution of their choice.

Hence, they should prefer taking loans from reputed financial institutions as such institutions are more competitive and stable in the long run.

Many small scale banks and financial institutions on the other hand have a higher rate of .

Moreover, they lack stability in the long run as they offer loans to borrowers with low creditworthiness and weak profile which drive their NPAs to worse and eventually put pressure on their existing portfolio of borrowers.

 

3. Don’t submit the file with incomplete documentation – This is one of the most common reasons why your loan process gets delayed and in worse cases comes to a halt.

Documents checklist is more or less remains common across all banks and all applicants are expected to hand over all documents in one go as per the checklist provided.

Any deviation in the whole process can prevent the loan processing officer from giving their clear opinion about your proposal to sanction the loan.

Hence, being systematic with paperwork will not only save you time but also save inconvenience caused to many parties involved.

 

4. Never let your processing fee bounce – Cheque bounce is a very critical offence whether it is involving your loan processing fees or any other transaction.

Do not stop payment of processing fees or for any reason without informing your banker even if your loan gets rejected.

Doing so may get you blacklisted by the bank for unethical behaviour and cause permanent damage to your .

 

REASONS FOR REJECTION OF PERSONAL LOAN APPLICATIONS

The following are some of the reasons due to which your PERSONAL LOAN application can get rejected.

1. Poor Credit Records – Banks and financial institutions always seek customers who are not only eligible to get a loan but also have the right intent to pay it back with interest.

Hence, all lending institutions rely heavily on reports which they receive from credit bureaus like Equifax and Transunion.

A CIBIL report contains the repayment track record of the payment behaviour and loan repayment patterns of all individuals who have taken a loan or some credit facility from any of the RBI registered lending institutions at some point in their life.

Any default in their loan repayments in the past is reported and can straight away get them rejected for the loan they apply for in the future.

 

2. Income / Repaying Capacity – Most banks will accept the maximum of 70% of your net monthly income as your total loan repaying capacity.

It also includes all existing s that you are currently paying towards other loans. Hence, having too many loans with high payments can reduce your overall loan eligibility to zero.

 

3. Being a guarantor for someone else’s loan – Sometimes, borrowers become guarantors to help their friends and family members secure loans, unaware that such guarantees can affect their overall loan eligibility and reduce their own borrowing capacity.

Being a is as good as being the applicant of the loan. They are reported as a to and the liability of the borrower in case of default becomes the liability of the .

Hence, if a applies for a loan, he needs to obtain the 1-year loan account statement and bank statement of the borrower reflecting payments to prove that the payments are being made by the loan applicant only.

 

4. Improper personal and property documents – KYC and financial documents are the basic set of documents that banks require to check the eligibility and sanction the loan.

Any shortfall or irregularities in any of these documents can lead to a rejection of a loan on this ground.

 

5. Financial irregularities and job instability – Changing jobs too frequently, having 2 years ITR filed in the same year, having cash income, delay in salary payments, no availability of ITR, having a gap in service displays instability and may lead to rejection of your loan application.

 

6. Blacklisted area – Many locations are blacklisted by many banks and lending institutions due to their poor track record and many other reasons. If the applicant’s place of residence is located in any of those areas then they are least likely to get the loan from these lending institutions.

 

7. Customer profile and dependants – Apart from assessing income and CIBIL records, banks also give utmost importance to personal discussion where they try to understand the applicant’s lifestyle and saving habits.

Having limited income with too many dependants, having liabilities higher than assets, bad saving habits etc. can make banks uncomfortable to lend and call for explanations and assurance on repaying the loan.

However, if they are not satisfied with the responses given, they can put a negative mark in their report which can lead to rejection of your loan application.

In some cases, banks can insist on having a and sanction the loan.

 

8. Cheque bounces – Cheques bounces are looked at very seriously and even a couple of instances can lead to rejection of loan application unless justified by the applicant with proof to the bank’s satisfaction.

 

HOW TO SELECT A GOOD PERSONAL LOAN LENDER?

Selecting a PERSONAL LOAN lender only on the basis of lower interest rate and discounted processing fees can be deceiving. It is quite possible that due to this narrow approach, you may face problems and end up paying much more than what you have imagined.

Hence, every PERSONAL LOAN applicant must make their loan selection process subjective based on the following parameters.

1. Bank Policies – Different lenders have a defined set of criteria for sanctioning loans. For eg. Some lenders do not give loans to siblings, to individuals below a particular salary bracket, to individuals working for a proprietorship firm etc.

Hence, an applicant should discuss their specific requirements in detail with their banker before submitting the to them to avoid a waste of time, money and energy.

1. Rate of Interest – An applicant must choose a lender offering the lowest rate of interest. However, the lower rate should not come at the cost of other benefits.

The interest should be charged on reducing balance and not as simple interest.

 

2. Processing Charges – Processing fee is another aspect that should be considered while availing personal loans. The lender charging the lowest processing fee should be preferred.

 

3. Products – “Flexi loan” is a pre-sanctioned line of credit that offers flexibility to withdraw funds instantly as and when needed and prepay anytime without penalties.

Such facilities are very useful during emergencies. Hence, applicants should enquire about all such product variants available in the market and choose the one that suits them the most.

 

4. Range of Tenure – Personal loans offer tenure in the range of 1 to 5 years.

 

5. Minimum and Maximum loan amount – Most lenders offer personal loans in the range of Rs. 1,00,000/- to 25,00,000/-.

 

6. Pre Payment Penalty – Prepayment penalty differs from bank to bank hence the lender with the lowest prepayment penalty should be preferred.

 

BENEFITS OF PERSONAL LOAN

The following are some of the most useful benefits of availing a PERSONAL LOAN facility.

1. Quick Processing – Personal loan processing is the easiest and the quickest. It can be approved within as quickly as 24 to 48 business hours.

 

2. Easy paperwork – Since there is no collateral required for processing personal loans, they can be processed with minimum documents.

Personal loans are approved only basis CIBIL records and income related documents.

 

3. Line of credit – Flexi loan is one of the variants in personal loan space.

This product comes with a pre-sanctioned line of credit where borrowers can withdraw funds instantly as and when required and even pay it back at his comfort without penalties.

 

4. Helps improve credit score – Personal loan being an unsecured loan involves the highest level of risk of default of non-payment of dues.

A personal loan borrower is not at a risk of losing an asset for not repaying the loan.

Despite this, when borrowers pay their personal loan regularly, it displays their right intent and integrity to repay their debts on time. This in turn helps them improve their credit score significantly.

 

5. Cheaper than credit card rates – Personal loan being cheaper than credit card dues, borrowers can repay their credit card balance by availing personal loans and save interest.

 

LIMITATIONS OF PERSONAL LOAN

The following are some of the limitations involved in PERSONAL LOANS.

1. High-Interest Rate – Personal loan carries the highest rate of interest in the retail loans segment.

 

2. Pre-Payment Penalty – Since personal loan attracts pre-payment penalty, its borrowers have to give away the comfort of going with maximum tenure, pay high EMIs and take pressure on their cash flow.

 

3. Low tenure high EMI – The maximum tenure a personal loan offers is 5 years. Due to this, borrowers are forced to make high EMI payments.

 

4. No tax benefits – Personal loan does not provide any tax benefits.

 

BASIC INSTRUCTIONS TO ALL THE PERSONAL LOAN BORROWERS

WHAT TO DO AFTER THE LOAN DISBURSEMENT?

The following are some of the instructions that all the PERSONAL LOAN borrowers must follow immediately after they get their loan disbursed.

1. Preserve your original “Sanction Letter” – A “Sanction Letter” specifies all the terms and conditions of your loan contract and is an important document for future reference purposes.

 

2. Get your net banking facility activated – These days with the development of digital platforms, most of the loan related information, availing certain services and obtaining documents like loan account statement, making transactions from overdraft account, viewing updated loan terms like rate of interest, balance amount and tenure, etc. are easily accessible online. Hence, signing up for this facility can help borrowers track their details at ease.

 

3. Request a copy of the Amortization Schedule from your lender – “Amortization Schedule” gives you the detailed summary with a break-up of all future installments till the end of the loan. It shows the allocation of principal and interest from the EMI payment month on month.

Hence, for a 5 years loan, a borrower can get a fair idea on how much his loan outstanding will be after a specific period and out of 60 s how much will be allocated towards the principal and the each month. Click here to get the view of it.

 

4. Keep a record of Post Dated Cheques – You may have to provide 8 to 10 post-dated cheques (PDC) or undated cheques (UDC) to your loan provider at the time of loan disbursement. These cheques are security cheques that your lender will insist on.

In case, the borrower stops making payment, these cheques will be used and sent for clearing. If dishonoured, the bank can take legal action against the borrower since cheque bounce is a legal offence.

Please keep a record of all such cheques as you may want them back after closing the loan. You can either insist the bank give a letter specifying the details of these cheques or simply preserve the copy of the counterfoil which is attached to the front or the back of the cheque book.

 

WHAT TO DO AFTER THE LOAN IS PAID OFF?

The following are some of the instructions that all PERSONAL LOAN borrowers must follow immediately after they pay off their loan.

1. Obtain original “No Dues Letter” – “No dues letter” also known as “NOC” is a letter issued by the bank confirming that all the pending dues are cleared and the loan is closed.

 It is an important document to preserve for future reference and will be very useful in case of a dispute for incorrect credit reporting. If these documents are difficult to maintain then keep a scanned copy in your digital folder or email.

 

2. Collect all Post-dated cheques – You must have given few blank cheques or post-dated cheques also known as “PDC” at the time of availing the loan. Please remember to collect all unused cheques to avoid any fraud in the future.

 

3. Check CIBIL records – In some cases, it is observed, that despite paying off the loan, the bank has missed out reporting your loan as “Closed” to the credit bureau or erroneously misreported it as “Settled” or “Written off” which may dampen your credit score and further delay may cause irreparable damage to your credit history.

Hence, it is of utmost importance to check your CIBIL report only on www.CIBIL.com 45 days after the loan closure date.