Frequently asked questions
Personal Loan Eligibility Factors
A personal loan as the name suggests is provided to individuals and not businesses. Most banks and NBFCs (Non-Banking Financial Companies) offer personal loans to both salaried and self-employed individuals/professionals. The eligibility criteria for a personal loan vary slightly depending on the type of applicant. Following are some of the key personal loan eligibility factors that need to be kept in mind*:
*The personal loan eligibility criteria mentioned above are generic in nature and actual eligibility factors will differ from one lender to another.
How do Personal Loan Work?
Personal loans are unsecured credit with flexible end-use that typically have a tenure of 12 months to 60 months. If a shorter tenure is chosen, individual EMI amounts are higher, while a longer tenure results in lower individual EMIs. The following are the key features of a personal loan:
No Collateral/Security Required: You don’t need to provide any collateral such as house or car to avail a personal loan. The loan is approved only on the basis of your creditworthiness, which depends on your credit score, income, repayment history, employer reputation, etc.
Flexible End Use: Unlike a car loan or home loan, personal loans can be used for multiple purposes, such as to meet expenses of a medical emergency, travel, house renovation, debt consolidation, etc.
Flexible Tenure: Personal Loans come with flexible tenure usually ranging from 12 months to 60 months.
Minimal Documentation: You can apply for a personal loan online and even offline with minimal documentation. Key documents that lenders generally need the applicant to provide include a proof of identity, a proof of address and a proof of income.
Quick Disbursal: Personal loan disbursal can happen within a period as short as a few hours, once the application is approved. Turnaround times can also be as short as a few minutes, if you are able to avail a pre-approved loan offer.
Flexible Loan Amount: The eligible personal loan amount is based on an individual’s repayment history, monthly income, age, profession, employer reputation and other such factors. Lenders offer personal loans of amount as low as Rs. 10,000 to as high as Rs. 40 lakh.
Personal Loan Interest Rates
Personal loan interest rates differ from one bank to another. The rates are also affected by application based factors, such as credit score of the applicant, quantum of loan and tenure.
Factors Affecting Personal Loan Interest Rate
Credit Score: It is a 3-digit number between 300 and 900 which is based on an individual’s financial health and repayment ability. Higher your credit score, higher are the chances of getting a personal loan and being offered a lower rate in interest.
Loan Amount: Some lenders charge a higher interest rate if the applicant is borrowing a higher loan amount. This is due to the perceived higher risk of default as a higher loan amount typically translates to a higher EMI payout.
Loan Tenure: Some lenders charge a higher or lower interest rest for a longer tenure personal loan as compared to the same loan for a shorter tenure. Such variation typically depends on the bank’s internal criteria.
Repayment Capacity: In some cases, personal loan borrowers may be charged a higher rate of interest in case they have high existing debt. This is because a higher fixed obligation typically increases the risk of default by the lender.
How to Calculate Total Cumulative Interest
The annual interest on a loan is calculated using the formula:
I = P x (R/100)
Where, I = Interest payable, P = Principal (loan outstanding) and R = Rate of Interest (annual percentage rate)
While the above formula can be used as in case of a personal loan with 1 year tenure, multi-year loan may feature different principal in successive years as the loan is repaid.
Subsequently, the different interest amount for each year has to be added to calculate total cumulative interest of a personal loan. To eliminate the need of making such complicated calculations, it is advisable to use an EMI calculator which instantly provides you with details such as the total interest payable on your home loan.
Tips to get a low PL Interest Rate
Typically, interest rate applicable to a personal loan is lower if the lender perceives you to be financial responsible. The following are some ways you may be able to get a low interest rate for your personal loan:
Maintain a high credit score and clean credit history
Ensure you have minimal outstanding debt i.e. credit utilization ratio of 30% or less
Apply for personal loan with a lender with whom you have a prior relationship
Opt for a secured personal loan such as loan against shares, NSC, KVP, LIC, etc.
While the above tips are a good starting point to get a lower interest payout for your loan, a low interest rate is not completely assured as there are multiple factors that impact loan interest rate.
Ways to decrease total interest payout
While it may not be possible to get the lowest rate of interest for your personal loan, there are 3 ways you can decrease the total interest payout on your loan:
Opting for a shorter tenure – Higher individual EMI but lower overall interest payout
Part pre-payment/foreclosure – Decreases the loan principal thus interest payout is lower
Opting for a lesser loan amount – Lower loan principal equals lower total interest payout
Reducing Balance v/s Flat Inteest Rate Method
Reducing Balance Method
Method of Calculation : EMIs are calculated only on the principal amount outstanding after each prior payment.
Flat Interest Rate Method
Method of Calculation : EMIs are calculated on the original amount borrowed, i.e. the entire loan principal.
Documents Required for Personal loan
Identity Proof : PAN Card/ Voter’s ID/ Aadhaar Card/ Passport/ Driving License
Address Proof : Bank Account Statement/ Aadhaar Card/ Lease/ Property purchase Agreement/ Utility Bill (not more than 3 months old)/ Passport/ Driving License
Income Proof :
Business Proof : Certificate of Practice/ Partnership Deed/ GST Registration and Filing Documents/ MOA & AOA/ Shop Act License
For Salaried Individuals : Salary Slip/ Bank Account Statement/ Form 16
For Self Employed : Previous Year ITR/ P&L Statement and Balance Sheet/ Bank Account Statement
Loan Verification Process
The verification process for a personal loan involves the following key steps:
Step 1: Once you have submitted your online application we receive your online loan application.
Step 2: Subsequently, OUR representative will call you to verify application details and arrange for pickup of documents required for your loan application.
Step 3: Once the documents have been collected and successfully verified, the personal loan application is approved.
Step 4: Loan is disbursed once the applicant signs the loan agreement.
How is a Personal Loan Disbursed?
Once your personal loan application is approved and the loan has been sanctioned, disbursal occurs in one of 2 ways:
Option1. Direct transfer of funds to a savings/current bank account specified by the applicant
Option2. An account payee cheque/ draft sent to the applicant’s mailing address by post
Currently the 1st option is more commonly used as disbursal is quicker and there is no risk of a cheque/draft getting lost in transit by post.
Factors affecting Personal Loan Disbursal Limits
The main factors affecting the disbursal limits of personal loans include the following:
The list of factors impacting disbursal limits of personal loans mentioned above is not exhaustive and there may be others that impact the disbursal decision made by lenders.
Income of the applicant – higher income level tends to increase the disbursal amount
Current EMI payable – higher EMI payouts typically decrease the disbursal amount
Number of dependents – higher number of dependents usually decrease the disbursal amount
What are the Different Ways to Pay Personal Loan EMI?
Timely EMI payments of your personal loan are essential to ensure that you maintain a clean credit history and good credit score. There are multiple ways you can pay your loan EMI:
Do keep in mind that the different EMI payment options mentioned above may or may not be available in case of your lender.
How to Reduce Your Monthly EMI?
If you are finding it difficult to keep up with your monthly loan repayments, you might be able to negotiate a lower EMI by extending your repayment tenure. You should however bear in mind that in this situation, due to the longer tenure, you will end up paying more interest over the loan tenure.
The alternative is to opt for a personal loan balance transfer. In this case, the principal outstanding of your current loan is transferred to a new lender at a lower rate of interest. As a result of the lower interest rate, your individual EMI payments will decrease.
Standing Instructions – You can use NACH mandate to set up standing instructions
Autopay – You can use internet banking to set-up autopay for EMI payment
Online Transfer – EMI payments can be made online using NEFT, RTGS, IMPS payments
Cheque/Draft – Post-dated cheques (PDC) or drafts can also be used to pay your PL EMI
Some Must Know terms related to Personal Loan
The following are a few specific terms related to personal loans that you must know:
Personal Loan for Women: It is a special category of personal loan offered to women by several banks and NBFCs. A preferential rate of interest is applicable in such cases to promote and support female entrepreneurs and working women.
Personal Loan for Pensioners: It is offered to senior citizens so that they can meet their retirement needs, medical expenses, or plan a trip without any financial constraint.
Pre-approved Personal Loan: This is a special category of personal loans, also known as instant personal loans. These are usually offered to existing customers (account holders/credit card holders) of the bank or NBFC. Instant personal loans are characterized by minimal to no documentation and quick disbursal of the loan amount (generally within a few hours). However, the loan amount sanctioned in such quick personal loan offers depend on the applicant’s profile and cannot be changed.
Top-up Loan: This is a personal loan issued to a borrower who already has an unpaid personal loan from the current lender. Top-up personal loans are usually available to select PL customers of the NBFC and they often feature an interest rate similar to that of a standard personal loan.
Balance Transfer: Balance transfer is the process by which the principal outstanding of an existing loan is transferred to a new lender offering a lower interest rate. This decreases the overall interest payout over the loan tenure.
EMI: Equated monthly installments (EMI) are the scheduled monthly payments that a borrower needs to pay over the loan tenure to pay off the amount borrowed along with interest accrued.
Partial-Prepayment: In case the borrower decided to repay a loan amount that is greater than the monthly EMI payout, the extra amount is considered to be a partial-prepayment. Such partial prepayment decreases the outstanding loan principal and in effect reduces the total interest outgo for the loan. In such cases, prepayment penalties and related taxes may be applicable.
Charges & Fees related to Personal Loan
Apart from interest charges, some additional charges may also be applicable to a personal loan. Some of the most common ones that should be kept in mind are as follows:
Processing Fees – This is a fee to cover the administrative charges related to the disbursement of a personal loan. Processing fees are usually between 1% and 3% of the loan amount sanctioned.
Prepayment/Foreclosure Charges – When an amount in excess of the standard EMI payment is made, it is counted as pre-payment of a loan. In case an outstanding loan is paid off before the end of its tenure, the process is termed as foreclosure or complete pre-payment. In most cases, lenders charge a fee known as foreclosure charge at the time of making this complete prepayment. Typically prepayment/foreclosure charges range from Nil to 5% of the principal amount prepaid plus applicable taxes on top of the loan principal outstanding.
Late Payment Charges – These charges are levied when the borrower is late in making EMI payments. This is typically a fixed charge that borrower will need to pay along with the due amount.
Cheque Bounce Charges – In case an EMI payment is missed as the account linked to the post-dated cheque is low on funds or the account has been closed, a cheque bounce charge will be applicable. This is typically applied as a fixed charge of around Rs. 500.