1. What is a personal loan?A personal loan can be obtained for any purpose be it for a holidaytrip or a wedding expense.You can take the personal loan when you have an urgent need for money in a lump sum.
2. How is a personal loan different from a loan against property, shares or gold?LAP – Loans against Property, loans against shares or gold are a more sensible option in comparison to an unsecured personal loan if one needs to pay back the bank over a longer time frame. The loan amount one is eligible for is dependent on the value of the property and the interest rates are much lower.
It gives the loan taker ample time to repay the loan but the catch is failure to do so will result in the property being auctioned to secure repayment by the bank/financial institution.
On the other hand, the advantage of a personal loan is that it requires minimum documentation and is quicker to process.
3. Who is eligible for a personal loan?People with a regular source of income, which includes salaried individuals, self-employed professionals and self-employed business people.
4. How much money am I eligible for?You can borrow as much as you can repay. This in banking terms would mean a personal loan that has an EMI that does not exceed 40% of your monthly take home income, where the EMIs for existing loans are also deducted.
For self-employed applicants, profit is the benchmark that determines loan value. The longer the time frame for repaying the loan the lower the EMI and this also means you can opt for a larger loan amount. The loan amount you are eligible for is also dependent on other factors like the company you are employed with, the location of your residence and your credit history.
5. Can I have a co-applicant for a Personal loan?
Yes, you can opt for a co-applicant. This can help you increase the loan amount you are eligible for as the income of the co-applicant is also taken into consideration.
B. Calculating your loan Cost
1. What is EMI? How is it calculated?
An equated monthly Installment (EMI) is the amount of money that is paid back to the lender on a monthly basis. It is essentially made up of two parts, the principal amount and the interest on the principal amount equally divided across each month in the loan tenure. The EMI is always paid up to the bank or lender on a fixed date each month until the total amount due is paid up during the tenure.
2. Can you specify the borrowing range for a personal loan?The borrowing range varies across different financial institutions and also takes into account the applicant’s profile. However broadly speaking, the range is between Rs.50,000 and Rs. 20 L.
3. What is the minimum and maximum tenure of a personal loan?The time frame for most personal loan repayments ranges from 1 year (12 months) to 5 years (60 months), but a select few financial institutions offer 7 year tenures as well.
C. Credit history
1. What is credit history? How does a financial institution check on my credit history?
A credit history is basically a record of your past repayments of loans and credit card bills. Also, there is a central bank of data available with the Credit Bureau of India Limited (CIBIL), where data from all the banks on existing loans and their repayment patterns of their customers are accumulated. Before approving your loan a financial institution always checks with CIBIL on your loan repayment track record.
2. Is the repayment track record of my previous loans considered in calculating my eligibility for a new loan?
It definitely has its benefits! A good repayment track record could fetch you a higher loan amount at a lower interest rate as it is standing proof for your money management capabilities. In case of a bad repayment record you will be charged high interest rates and you will find it difficult to obtain a loan.
3. If my loan application is rejected, does that reflect on my record?
Every time you apply for a loan to a financial institution, your credit report with CIBIL is checked and the inquiry appears on the record. Many such inquiries will adversely affect the interest rates you are charged and will make your borrowing options limited as it suggests you are likely to be facing a financial crunch.
2. What are the fees and charges payable for a personal loan?
There is usually a fee of about 3% of the loan amount charged when you apply for a personal loan. However, this varies from bank to bank and is also based on the credit profile of the borrower.
3. What does prepayment charge mean? Does it matter while comparing loans?
A personal loan is repaid to the lender within a fixed time frame, which is usually 1 to 5 years. In case you want to clear the loan payment earlier than the agreed time frame, the bank levies a prepayment penalty charge. This could be up to 5% of the outstanding loan amount but can vary according to the bank and the credit profile of the borrower. Make sure the interest saved by pre-paying exceeds the prepayment fee paid. This is one of the factors to keep in mind while comparing loans.
4. What is the difference between a fixed interest rate and floating interest rate?
A fixed interest rate remains constant throughout the loan tenure regardless of the market conditions whereas a floating interest rate can decrease or increase depending on market fluctuations. For instance, it increases when RBI hikes up short term interest rates. Banks usually quote the floating rate loans as their index rate (prime lending rate) plus or minus x%. Banks usually increase or decrease their prime lending rate when the RBI increases or decreases short term interest rates.
5. What are the different types of interest rates available?
Interest rates are quoted either as fixed flat rates or reducing balance rates.In the flat rate method of interest calculation, the outstanding loan amount is never reduced during the entire tenure of the loan even though you make payments monthly.
In the case of reducing balance interest rates the EMI is calculated on the basis of daily, monthly, quarterly or annual rests.A ‘rest’ indicates the time frame in which the bank will recalculate the EMI based on the amount of loan paid back and the frequency of any compounding interest rate. Suppose you have a loan with an annual ‘rest’ then, though you pay a monthly installment, your benefit kicks in only at year end, here the bank gets to benefit. A monthly ‘rest’ will recognise the reduction in the loan amount on a monthly basis, a quarterly rest does it every quarter while a daily ‘rest’ will do it each day. The more closely the rest matches the frequency of your payments, the lower the total interest paid as the total outstanding loan amount is reduced by your monthly payments more frequently.
6. What are the factors I need to keep in mind while comparing loans from different financial institutions?
A loan applicant needs to keep a few things in mind when comparing loans. The applicant needs to determine the kind of loan and the amount he wants to apply for. He needs to keep in mind the total cost of the loan, which will be paid up by the end of his loan tenure.
Other factors that you should look out for are customer service levels and the average time the bank takes to process a loan.
E. Documentation
1.What are the documents required to apply for a personal loan?
Documents that need to be provided for a personal loan differ according to the profile of the applicant and the bank the applicant chooses to go with. Also, it differs for a salaried individual and a self employed individual.
However the standard documents that are usually needed include ID Proof, Residence Proof and Income Proof.
Here are a list of options for each of the proof documents.
I. ID Proof : PAN Card, Passport, Driving License, Voter’s ID, Credit Card with Photo, Employee ID Card, Photo Ration Card.
II. Residence Proof: Telephone Bill, Electricity Bill, Water Bill, Gas Bill, Insurance Premium Receipt, Passport, Rent/Lease Agreement, Allotment Letter (in case of govt. accommodation).
III. Income Proof:
a. For Salaried Individuals – The last 3 months’ Salary slips or the last 3 months’ bank statements where the salary is credited.
b. Self-employed Individuals – ITR for last 2 years,complete audited financial of the partnership/company, last 6 months’ bank account statements.
F. Processing the loan
1. How long will it take for the financial institution to contact me after I submit my application?
Most financial institutions will contact you within one business day of your application being submitted.
3. How long will it take for the financial institution to approve my loan?
Loan approvals are at the sole discretion of the financial institution. The time taken to approve a personal loan usually varies between 48 hours and a week.
4. How soon will I get my loan amount?
Once all necessary paperwork is completed, including submission of the post dated cheques (PDC) or signed ECS(Electronic Clearing System) form, the financial institution will usually disburse your loan within seven working days of the loan approval.
5. Does the financial institution verify authenticity of the submitted documents and the details provided in my application?
Yes, the financial institution will verify all submitted documents and the details provided in your loan application. Your application could be declined in case of any discrepancies.
G. Repaying the loan
1. How do I repay my loan?
Loans are paid up by issuing post-dated cheques for the entire tenure of the loan, by deduction at source from your salary or by issuing standing instructions to your lender for ECS (Electronic Clearing System) where the monthly payment (EMI) will get automatically deducted every month from your bank account.
2. Can I prematurely close my loan?
You can choose to prematurely close your loan but you will be levied a prepayment charge as penalty for the early closure. This can be up to 5% of the loan amount. Some banks do not allow you to close the loan in the first six months of the loan tenure.
3.Does it matter if I am late in repayment?
It does matter! You will be levied a fee for late payment and the terms for this will be agreed upon when the agreement is signed.
4. What if I default on my loan?
All your loan transactions are recorded in a central data bank which is collected at the Credit Information Bureau of India Ltd. (CIBIL). Defaulting on a loan will show up poorly on your credit history and could pose a problem when applying for a loan in the future.
5.Does it affect my co-applicant if I default on a loan?
Co-applicants are also held responsible for repaying the loan. Defaulting on your loan will affect their credit rating as well.
6. Can the lending bank , change interest rate whenever it chooses?
Most personal loans are given out at fixed interest rates and hence will not vary with market fluctuations. In case of a floating rate of interest it will increase or decrease with market conditions.
