Personal loans are available to both salaried and self-employed borrowers and are meant to meet personal and private expenses in times of emergency.
These loans are unsecured and are not covered by any security. Due to the absence of security, these loans bear a high rate of interest when compared to other types of borrowing such as home loan, vehicle loan, etc.
There are multiple providers of personal loans right from banks to financial institutions such as Non-Banking Finance Corporations.
In this blog, we seek to discuss different personal loan plans in India.
When Do You Need a Personal Loan?
As an individual, you may need a personal loan in any of the following situations –
- You are in the middle of a financial crisis and need funds urgently
- Unavailability of collateral for taking a secured loan
- A quick requirement of the loan and you do not have time for detailed documentation and process
- The loan is required for a short period (less than five years).
Benefits of Personal Loan
Following are the benefits of personal loan:
- Unsecured in nature and thus no collateral is required to be given as security
- Faster turnaround when compared to other loans. There are financial institutions that offer personal loan in less than five minutes
- Minimal documentation and approval based on KYC, CIBIL check and income proof
Interest Rate and Factors affecting Interest Rate
As per the current prevailing rates, financial institutes offer personal loans at 10% to 18% interest.
The rate of interest and quantum of loan is a function of your income, and the company you are working with, loan amount and repayment capacity.
Generally, it is observed that for the higher loan amount, the rate of interest tends to reduce.
Banks and NBFCs launch attractive schemes particularly for individuals associated with reputed organizations. The rate of interest offered is dependent on the categorization of your company in the bank’s internal system.
This internal category varies from bank to bank, and thus it is advisable to check for personal loan offers from multiple banks.
Where to Apply?
If you are looking for personal loans with faster disbursement in less than two days, you should check out – HDFC Bank, Tata Capital, IIFL, RBL Bank, Citibank, and ICICI Bank.
Some of these banks have tied-up with start-ups and have also launched their mobile application for instant loan processing. The interest rate charged by these banks is between 10.99% to 18%.
Process of Application
With the online application process, you can get instant approval for a personal loan without having to submit documents physically.
All you need is to key in your personal information, salary, loan information, Permanent Account Number and Aadhar Number for CIBIL check.
Once your loan is approved, you can quickly get the amount credited if you are an existing customer of the bank where you have applied.
If you are not an existing customer, you may have to upload the scanned copy of few documents such as canceled cheque, bank statement, salary slip, employee id card, aadhar card, address proof, and PAN card.
You may be asked to submit these documents physically in some cases where a loan officer visits you at your place before loan disbursement.
Do’s and Dont’s for personal loans
To avail the best personal loans, you may follow the following do’s and dont’s.
1. Check for Offers
You should check for current offers; interest rates offered to employees of large reputed companies before applying for the loan.
2. Compare Rates for Different Loan Value
It is advisable that you check the interest rate applicable for different loan value. Often it is seen that banks offer low interest rate if the loan amount is high.
3. Do Not Apply With Multiple Banks
If you apply for loan simultaneously with numerous banks, each of your application is recorded in your CIBIL report. This process can hurt your CIBIL score thereby impacting your chance of availing a loan
4. Check for Discounts Based on Tenure of Repayment
Often banks offer some attractive offers such as waiver of processing fee etc. depending on the repayment period. Before applying for a personal loan, you should check rates and offers regarding processing charge available for different tenure.
5. Salary Bank May Not Provide the Best Offer
Often people think of availing loan from the bank where you have a salary account. This is also used as a marketing gimmick by various banks. But, you should be cautious with your application. It is advisable not to blindly trust the mailers messages your bank, where you have your salary account, send. You should always check the offer from competitors, and there is a high possibility of availing better rates or offers.
We believe, before applying for a loan, you should make a detailed comparison of personal loan interest rate including different charges such as processing fees, pre-closure charges, GST, service charge, etc.
Banks typically charge a processing fee on personal loans. This fee can range from Rs 999 to up to 2% of the loan amount (whichever is higher).
Given the fact that these are short-duration loans, a high processing fee could result in a high cost on loans. Thus, it is essential to compare the All Inclusive Rates (AIRs) for personal loans while opting for it.
Personal loans, as I mentioned above, is an unsecured loan. Thus, some bank requests you to opt for an insurance policy to cover the risk of your loan. This is generally done where the loan amount is significant when compared to your income.
Often, the banks add the one-time premium of these policies in the personal loan amount to prevent the borrower from paying separately.
Thus, it is essential that you flip through the sanction letter carefully to check regarding the insurance policy, coverage, premium applicable and other benefits of the policy.
Often this is a point where banks try to mis-sell the insurance product without giving complete information to the borrower. So, next time whenever you are opting for a personal loan or any other loan for that matter, always check for the insurance policy in the sanction letter.
Also, you should also do a comparative analysis of various insurance policies that are available in the market to get the best coverage at the lowest premium.
Pre-Payment and Foreclosure
People always want to get rid of their liabilities. Thus, it is seen that whenever an individual has surplus funds, he/she seeks to repay a part of the loan before the due date.
This is called the pre-payment. When an individual closes the loan account, by prepaying the outstanding amount, before the actual tenure, it is known as foreclosure.
Typically, banks levy a prepayment or foreclosure charges on personal loans. This can range from 0% to 5%. Thus, you should check carefully if the lower interest rate on personal loan comes with any heavy prepayment/foreclosure charges.
Also, some banks don’t let you prepay or foreclose the loan for a certain period of the total loan tenure. This period is known as the lock-in period.
Key Features Considered in the Personal Loan
- Age of the borrower – Loan is available to both salaried and self-employed professionals within the age group of 21 and 60 years
- Loan Amount – Loan amount can range from Rs 50,000 to Rs 50 Lakh.
- Loan Tenure – Tenure can range from 3 months to 60 months.
- Interest rates – Interest Rates typically starts from 10%.
- Processing Fees – Rs 999 to 2% of loan amount.
- Documentation – PAN, Aadhar, Address Proof, Identity Proof, Income Proof.
How to Improve Chances of Getting a Personal Loan?
Personal loans as mentioned are mostly unsecured. Thus, the banks have a pre-defined credit policy around the approval of the same. Several loan applications get rejected as the borrower do not fulfill the basic set of rules of banks for approval of these loans.
Thus, it is essential that the borrower works on improving his/her chances of getting approval by adopting the following tips –
Compute Credit Score and Improve It
You should always check and compute your credit score before applying for a loan. Four credit bureaus operate in India.
These include CIBIL, Equifax, Experian, and CRIF High Mark. These credit bureaus provide personalized credit report within 24 hours of applying.
Generally, the score is on a scale of 800. A low score implies high chances of defaulting on loan payments.
On the other hand, a high score indicates a high probability of getting loan approval, along with a low-interest rate. It is necessary to improve your score above 750 to get the loan approved.
Disclaimer: The views expressed in this post are that of the author and not those of Groww