A personal loan is a short-term loan that a financial institution grants to an individual at a fixed interest to help them pay for personal needs such as for a wedding, their home renovations, education or travel.
In India, personal loans are usually unsecured loans, which means applicants do not have to provide any security or collateral against their borrowing. These loans for which consumers agree to pay a predetermined interest rate within a stipulated tenure are also generally referred to as consumer loans.
Some financial institutions in India offer secured personal loans that allow consumers to avail a financial grant approved by a financial entity upon pledging a collateral, which could be your assets such as a personal house, real estate or your jewellery among others.
Let’s understand how you can get a personal loan in India and all aspects you must know before taking a personal loan.
What You Need To Get a Personal Loan
A personal loan becomes easy to avail when you have a satisfactory credit profile. Every individual who wishes to apply for a personal loan must ensure their credit profiles have these boxes checked:
Credit score is a three-digit number, ranging between 300 to 900, which a credit reporting company derives at post analysis of the credit profile or the creditworthiness of an entity.
To avail a personal loan in India, consumers must ensure they maintain a good credit score by fulfilling their financial obligations on time. A good credit score for a personal loan ranges anywhere between 700 to 750.
If you have defaulted on any loan of monthly installment for products or services purchased in the past, you could see a dent in your credit score. This could be problematic at the time of applying for a personal loan.
For personal loans to be granted, consumers must bear in mind financial institutions are interested in your ability to pay back and evaluate the stability of your income.
If you are a salaried employee, you are expected to be drawing a salary at least for the last six months prior to applying for the loan. Institutions study your salary statements to understand your capabilities of meeting the interest payment liabilities.
For those who are business owners, the business needs to be active for a minimum of three years. Institutions seek the income tax filings of your business to examine the robustness of your credit repayment ability.
Financial institutions allow consumers between the legal age to apply for loan to be eligible for personal loans.
An individual’s age can range between 18 to 65 years, in general, to be able to apply for a loan, although different lenders may apply their own age requirements
Personal loans are short-term loans, which means they are granted to be paid off in a small span of time.
In India, a personal loan is generally granted for a tenure ranging between 12 to 60 months. Depending on your tenure, your monthly repayment installment changes.
Your monthly payment is higher for a shorter tenure loan and lower for a longer tenure loan and a choice must be made depending on the availability of funds to repay the loan.
Loan Disbursal Amount
There is no cap, in general, on the amount that you can seek to avail via personal loans. The amount of loan you are eligible for depends on your income and existing loan liabilities if any.
A financial entity factors the monthly repayment installments not to exceed more than half your salary and evaluates if you can pay the monthly installment without compromising on other expenses.
While banks offer a minimum loan amount of up to INR 30,000- 50,000, non-banking financial companies (NBFCs) that are allowing smaller personal loans to be taken offer as low as INR 3,000. The maximum amount of loan that can be availed completely depends on the lender and their analysis of your ability to meet loan requirements.
Cost Associated With a Personal Loan
Before taking a personal loan, you must know about five basic costs that may be applicable to your loan.
An interest rate is applied on your loan. This rate is over and above your principal amount of the loan and if often in the range of 10% to 25% depending on your creditworthiness and loan amount.
All financial entities charge a processing fee, also called origination fees, which is the cost you pay to process your loan. This charge is anywhere between 1% to 3% plus taxes depending on your financier.
If you decide to repay your loan before the stipulated period, the financial institution charges a prepayment penalty. This is anywhere from 5% to 8% and differs from one entity to another.
Loan Cancellation Charges
If you are granted a loan and you decide to cancel your loan, a charge is imposed by your lender. These charges are subject to independent policies of different companies.
Monthly Instalment Payment Bounce Charges
All financial institutions levy a bounce charge upon failure of deduction of the stipulated installment for the month. Whether it is a cheque or a standing instruction via your bank account. If your monthly payment is not honoured on time and the cheque bounces or the request is declined, you have to pay a penalty.
This ranges anywhere between INR 300 to INR 500 depending on your lender.
Personal Loan Types You Can Avail
The use of secured personal loans is limited in India and most personal loans fall in the unsecured category.
The types of personal loans available include:
In India, personal loans are available to meet medical emergencies. If you don’t have a medical insurance cover or are unable to get assistance from your insurer, you can apply for an instant personal loan for medical purposes.
Among the most popular personal loans, education loans in India are often taken by parents who have the financial stability to convince a lender to grant a loan. This loan is then transferred for the student to pay once their education tenure is complete and they find employment.
Education loans are widely accepted in India and are often taken at the higher studies stage. For parents who wish to take a personal loan for schooling, the provision to apply for such loans exists.
These loans are aimed at retired personnel who wish to avail a loan for their personal use. The criteria applicable for personal loans differ for these kinds of loans considering the evaluation of repayment is often based on the pension the retirees receive instead of their current income source.
Debt Consolidation Loan
If you have multiple loans and wish to ease the process of managing all the loans, you can opt for the debt consolidation loan. In this kind, all your loans are clubbed and you are expected to pay a single monthly installment instead of multiple ones for varied loans.
When you have an existing personal loan, you can seek a top-up loan from your financial lender. Top-up loans often are charged a higher rate of interest as compared to personal loans.
Home Renovation Loan
Renovating your home can be costly and you may not necessarily have the funds needed to not make amends to the way your house looks externally or internally.
Indian weddings are often a big-ticket investment as the country culturally spends a large chunk on expenses relating to wedding decorations, food arrangements and gifting items for guests and the newlyweds and their families.
Indian actively opt for personal loans to meet the wedding requirements, and it is among the most popular kinds of personal loans.
From a savings economy, India is slowly moving towards a consumption economy and travelling as an experience is fast picking pace in India.
The last 5-6 years have seen the young population of the country travel much more than their parents did and that is adding to the popularity of travel loans as top personal loans.
Personal Loan Balance Transfer
As interest rates change, you may want to pay off your existing personal loan at a lower interest. You can do this by applying for a new loan with lower interest and pay back the old loan.
Such transfers are chargeable and you must check with your lender about their terms and conditions.
Steps To Apply For Your Personal Loan
The application procedure for a personal loan can be carried out via physical visits or an online application. In both the cases, digitization has ensured loans and charges associated with it can be compared beforehand and an informed decision is hence taken.
To apply for a personal loan, follow these steps:
Identify Your Lender
Finding the most suitable lender for a personal loan can be on the basis of a few factors:
Eligibility: Does your lender grant loans for the amount that you want?
Optimum Charges: Are their additional costs along with the interest your lender charges on your loan? If yes, are they valid?
Trustworthiness: Do they have transparent online declarations that match details given by their executives?
Compatibility: What are others saying about their experience about the lender both by word of mouth or online reviews?
A thorough search and comparison of different financial lenders offering personal loans will clear clouds of doubt about which lender fits your requirement the most. This step is your most important step as honouring each loan commitment is crucial to maintain a good credit score.
Select Your Personal Loan
Once you’ve selected your lender, you can choose the loan offering by them by comparing significant charges:
Interest: Does the interest rate charged on the loan fit your monthly budget?
Additional Charges: Are you being fairly charged fees on processing, documentation or registration of your loan?
Add-ons: Is your lender offering you discounts on other financial products such as insurance?
Taxation: Does your lender want to charge any additional tax on your personal loan for which you would be filing an income tax anyway?
Produce Documents Sought By The Lender
Adequate documentation ensures your loan disbursal time is shortened and hence you must have all the below documents ready beforehand:
Proof of Identity: Lenders in India accept Aadhaar card, PAN card, driver’s license and passport as proof of identity.
Proof of Residence: Aadhaar card, electricity or water bills and driver’s license all act as proof of residence.
Proof of Income: For salaried employees, lenders may seek the salary slips of the last three to six months and for business owners, income tax returns of the last three years are mostly sought as proof of income.
Photograph: Lenders do not grant personal loans to a third party and photograph ensures the person who has sought the loan is the person who will repay the loan.
Submit Your Application Form
Once all documents are in place, you can apply by either:
Offline: Physically visiting the nearest branch or the headquarters of the financial institution lending your the personal loan
Online: File your application on the lender’s website by filling in all the information required via digital know-your-customer details which most financial companies permit as officially valid documents.
Follow Up On Your Loan Grant
An ideal way of following up on your loan application is to give the lender the stipulated time sought for processing your request. Once that time crosses, you can do two things:
Verification: Check with your lender if they would like to verify any details submitted.
Seek Clarity: Ask your financial institution to provide you the status of your loan request. You can do this online or by reaching out to the lender via phone or a physical visit.
Follow Protocol: Your lender may take longer to cross-check information you have provided. A follow up process can be smooth when you don’t pressurize your lender to grant you a loan.
Keep Hope: If your loan grant is rejected, don’t lose hope and approach another suitable lender with your request. India has banks, non-banking institutions and fintech companies all provide loans to consumers. It is not compulsory for a lender to find you a great match and vice-versa.
Act Swiftly: If your loan is approved, you must act swiftly in procuring the loan amount as the interest on loan begins as soon as documentation is processed by the lender.