The festive season is approaching, and you might be considering various ways to immerse yourself in the holiday spirit. Perhaps you find yourself in need of quick and hassle-free cash. Maybe you’re planning a family trip out of town during festive holidays like Dussehra or Deepavali. It’s possible that you’re preparing for your wedding and require funds to book your honeymoon. Alternatively, there may be a family wedding on the horizon, necessitating financial resources for the celebration. You could also be facing a financial crisis.

If you find yourself in any of these compelling situations and lack sufficient cash on hand, obtaining a personal loan from a bank presents an ideal solution to meet these one-time, fixed expenses.

 Subas Tiwari

What is a Personal Loan?

Personal loans are loans granted for a limited period with a fixed amount and charged interest which are both repayable in monthly instalments. They are called ‘clean’ or ‘unsecured’ loans, i.e., loans without obtaining any tangible security (property, deposits, bonds, etc.). Only personal sureties are required to be furnished to confirm that you are a dependable person in society & will not default on repayment of the loan given. Personal loans are generally used to meet temporary cash requirements such as wedding, children’s education, home improvement/repairs, luxury holiday, buying a car or to buy an electronic appliance, etc.

There are several banks and financial institutions providing attractive deals on personal loan offers with lucrative interest rates. Each personal loan lending institution has different eligibility criteria, rate of interest, and repayment tenure, which should be reviewed and compared to make an informed and smart decision before applying. 

Eligibility for Personal Loan:

For Salaried Class

-Should be having a running bank account where salary is being credited regularly. The bank account need not be with the bank where one is applying for a personal loan, but banks prefer to consider such loans to be given to their own clientele as a priority.

-One should have a job of permanent nature. Banks would not give a loan to a person whose job is temporary. 

-The length of service or employment also plays a part in expediting the loan sanction.

-Place of residence should either be owned or rented with a lease agreement.

-Residence proof (voter ID card, Adhaar Card, etc.) & identity proof (employment ID card, PAN card, etc.) copies should be produced duly self-attested along with bank application form along with 2 photographs.

-Though the reason/purpose of the personal loan is not mandatory, the bank would like you to state some reason (any one of the above or other purposes, which can be vague like-for meeting unplanned personal domestic expenses. 

-If you already enjoy any other loan like car loan or home loan, those deductions will also be considered to calculate total deductions out of the salary & arrive at eligible loan amount.

-Your CIBIL score (see box) will also play a significant part in the bank’s decision in granting a personal loan.

-There is no fixed criterion for arriving at eligible loan amount, as individual banks have different methods of calculation, but the generally accepted practice is to fix a ceiling of about 50% of deductions from salary including the repayment of the loan to be granted. If you are within this ceiling, then the eligible amount could be about 10/12 times the gross monthly salary or 6 times the total taxable income as declared in Form 16 or the Income Tax Return. This can vary amongst nationalized banks & can be different among private banks (private banks commute on the take-home pay). 

For Self Employed

They are those who do either business or freelancing assignments and some work from home. They may do part-time or full-time assignments & so may be having more than one employer. The following additional conditions may apply when they seek a personal loan from a bank.

-Since he does not get a salary, the business income as reflected in the Income Tax Return would be the basis of ascertaining his total income.

-He may be required to submit details of his enterprise.

-The performance of the business can also be a factor in influencing his loan sanction. In the case of new enterprise, banks can insist on collateral securities like bank deposits, bonds, etc. in addition to providing one or more personal surety of adequate Net Worth.

For Professionals

They are those who either have their own business/service like Doctor, Lawyer, etc. or those who are technically qualified but are working in an organization. The following could be additional conditions to be fulfilled.

-The attested copy of their Qualification would be required to be submitted along with the application form.

-Since some of the banks have specialized personal loan schemes for such professionals offering lower rate of interest on such loan, the lending may ask some details of the profession   as also copies of Receipts/Payments and/or Income/Expenditure account.

Advantages/ Benefits of a Personal Loan to a consumer-borrower

• The first & foremost benefit is the quickness with which the loan application is either sanctioned or disposed of (rejected). The icing on the cake is in the timing.
• Secondly, in most of the sanctioned personal loans, the banks do not insist on any collateral security or in some cases, even personal guarantee/surety. So, it is advantageous for the loan-seeker, as he need not be under any obligation to his office colleague/friend to request for providing a personal surety.
• Most of the banks do not ask for margin component (borrower’s stake in the risk). Hence, there is absolutely no need for the consumer to run around to arrange to provide for depositing margin money.
• The purpose of the loan is immaterial in most cases. Hence, the consumer need not take pains to explain the genuineness of the purpose & submit proof for such purpose.
• Simple documentation is assured with no elaborate procedures.
• Making monthly repayments is now made consumer-friendly with banks agreeing to take post-dated cheques (PDCs) for the amount of each instalment and presenting the same on due dates of loan. The consumer need not visit the bank at all for such work. Where the loan instalment payable is to be taken out of the savings account of the customer, the banks obtain written instructions & act on them.

Disadvantages/Limitations to the consumer-borrower

• The first & foremost is that the rate of interest is the highest for this type of loan. It’s a costly cost to the consumer, as this is an ‘unsecured’ loan. In comparison, secured loans are comparatively cheaper.
• Secondly, the period of the loan is normally limited to 60 months. Banks do not favour or take exposure for a longer tenure. This limits the consumers’ requirements, where, by getting a longer period of repayment, he could bring his work to completion. 
• According to bank sources, this type of loan has a higher risk and can end up as a Non-Performing Asset, if repayment stops midway either due to change of job/temporarily unemployed status/death of the borrower/change of address without trace, etc. Hence, many banks do not consider giving a loan for non-customers, i.e., those who have no previous bank dealings with the lender. So, this severely restricts the options available to the consumer-borrower to seek a loan from any bank in the vicinity of his residence or place of work. 
• Most of the banks are not willing to grant personal loans of more than Rs.15.00 lacs even though their website/brochure talks of maximum amount being much more than what they say they will give. So, the consumer-borrower will not get the benefit of more loan even if he is otherwise eligible!
• Even though a couple of banks claim that they don’t need personal surety/guarantor for such loans, many of the banks insist on providing the same for the loan transaction to add trustworthiness to the loan contract.

Banks Personal Loan Interest Rates & Processing Fee

Interest Rates & Processing Fee Sourced from: https://www.bankbazaar.com on 04.09.2023

Here are 20 tips to consider when applying for a Personal Loan from Banks

• Assess Your Need: Determine why you need the loan and how much you need. Avoid borrowing more than necessary to prevent overburdening yourself with debt.

• Check Your Credit Score: Before applying, check your credit score. A good credit score can help you qualify for better loan terms and lower interest rates.

• Research Lenders: Compare personal loan offers from different banks and financial institutions to find the one with the most favourable terms and interest rates.

• Interest Rates: Pay close attention to the interest rates offered. A lower interest rate can save you a significant amount of money over the loan tenure.

• Loan Tenure: Choose a loan tenure that aligns with your repayment capacity. Shorter tenures typically have higher EMIs but lower overall interest costs.

• Fees and Charges: Understand the processing fees, prepayment charges, late payment penalties, and any other fees associated with the loan. Factor these into your decision-making.

• Loan Eligibility: Check the bank’s eligibility criteria to ensure you meet their requirements before applying. Eligibility criteria often include age, income, and credit score.

• Documentation: Prepare all required documents, such as proof of identity, address, income, and employment, before applying to streamline the application process.

• Co-applicant: If you have a lower credit score or income, consider adding a co-applicant with a better financial profile to improve your chances of approval and get better loan terms.

• Loan Amount: Borrow only what you can comfortably repay. Your EMI should not exceed 40-50% of your monthly income.

• EMI Calculation: Use online EMI calculators to estimate your monthly payments based on the loan amount, interest rate, and tenure.

• Read the Fine Print: Carefully read the loan agreement and terms and conditions provided by the bank to understand all clauses and obligations.

• Interest Calculation: Understand how the bank calculates interest (monthly reducing balance or flat rate) and how it affects your repayments.

• Prepayment Option: Check if the bank allows partial or full prepayment of the loan without incurring excessive charges. This can help you save on interest.

• EMI Date: Coordinate the EMI due date with your salary cycle to ensure timely payments and avoid late fees.

• Emergency Fund: Maintain an emergency fund to cover unexpected expenses, reducing the need for personal loans in emergencies.

• Budgeting: Create a budget to manage your finances efficiently and allocate funds for loan repayments.

• Regular Payments: Make timely EMI payments to maintain a good credit history and avoid penalties.

• Customer Support: Choose a bank known for excellent customer service to address any concerns or issues during the loan tenure.

• Review and Refinance: Periodically review your loan terms and consider refinancing if you find a better deal with lower interest rates.

Remember that personal loans should be used responsibly and for genuine financial needs. Borrowing without a plan can lead to debt accumulation and financial stress. Careful consideration and responsible financial management are essential when dealing with personal loans.

Reasons For Rejection of Your Loan

One of the possible causes for the bank to deny your loan application is outlined below. Therefore, it is advisable to be aware of these potential issues and take steps to avoid them, rather than experiencing regret and frustration later on.

Poor Credit Score

It is possible that this could be the reason for loan rejection. Nowadays Banks/FIs have voluntarily joined the Credit Information Agency called CREDIT INFORMATION BUREAU OF INDIA LIMITED (CIBIL) by sharing one’s credit details which includes all your present/previous loan transactions (even though they are closed & no longer is outstanding with that Bank) & credit card operations. Banks/FIs forward their own internal credit report on one’s credit performance and CIBIL awards marks based on that assessment (anything between 300 to 900 marks). CIBIL then uploads it in their website. The information is required to be updated (additions/deletions) at regular intervals by the Banks/FIs, who are admitted as Members of CIBIL. Banks invariably call for CIBIL report as soon as you apply for a loan. If your past transactions with a particular bank/FI either in loan repayment or credit card repayment were not up to the mark (termed poor CIBIL score-marks less than 700), then there is every chance of your present request for personal loan getting rejected by any other bank, where you intended to get the loan sanctioned. Hence it is advised for one to act prudently always to keep a clean repayment record for becoming eligible for any future credit requirements. Anyone can also seek their CIBIL score online by visiting CIBIL site (www.cibil.com). It is to the credit of this institution that 80% of approved loans (and sanctioned by banks) are of individuals with a CIBIL score of more than 750. 

Past Default

Banks draw up a list of their own defaulters & upload in their computer systems for any branch to look into & verify the past record of any loan-seeker. This is in addition to CIBIL report which contains credit information of the loan-seeker with other Banks. Let us say that there were delay(s) in repaying a fridge loan or a car loan (due to many genuine reasons). Or like, for example, you may have shifted to a new leased accommodation. That house address may be in Banks’ defaulters’ list, as the previous occupants would have been bank defaulters! 

There are certain enterprises run by loan-seekers which do not guarantee any regular income, and which could become a no-no for banks to lend.

Loan Guarantor

You might have stood as a personal surety by guaranteeing the repayment to the Bank in case of default by your friend, who was the borrower for a bank loan. You might have forgotten it, but the CIBIL report will also show you as a defaulter for the loan, even though you were only a guarantor! You could be in for a shock, but that’s how the system works! The moral lesson to learn is-think twice before offering to stand as personal surety to anyone. 

Many Loans

While calculating your eligibility for a loan, banks will normally add up all the existing outstanding loans from banks, private borrowings, etc before arriving at the eligible amount. The loan-to-income ratio is calculated (banks generally say that the total deductions –including the repayment of the present loan-should not exceed 50% to 70% of your take-home/gross salary) by the bank before extending a loan. So, too many loans/liabilities could throw off a bank from granting a loan because of this reason.

Job Stability

If you shift jobs very frequently or shift your location several times, it becomes public knowledge & could go against you, as the bank could be asking searching questions on this score. Good employment track record plays a favourable role in bank’s decision to give you a loan. Since this loan is not secured by any collateral security & is given based on good track record of employment (loyalty factor) & credit profile (good or acceptable CIBIL score), stability in one’s life is of prime importance in the eyes of the Bank.

Tax Record

Banks could make a thorough assessment of your tax profile by asking for the Income Tax Return (ITR) copies of previous assessment years or can ask details of tax deducted at source /professional tax paid against your salary in the past, Failure to give them or submit satisfactory answers could come in the way in your bank’s decision. So, the advice is-obtain Income Certificate/TDS Certificate/Form 16-16 (A) from your employer & keep it on record (for the rainy day!). Produce the same when necessary.

Past Loan Rejections

If you have applied for a loan or credit card in the past & got rejected (for whatever reason), applying now could get you a rejection. The lesson to be learnt here is-go for a loan only if it is a must! Enjoying too many credit cards is also not a smart idea!

RBI Defaulters’/Wilful Defaulters’ Lists

If your name is here, then worry! The Reserve Bank of India, who is the Regulator for Banks in India, also maintains the above lists, which is updated & uploaded in their website. These pertain to RBI Defaulters with Banks of more than Rs.10.00 lacs from the entire banking system. RBI Wilful Defaulters’ List is culled from the banks based on wilful default (deliberate attempt to hoodwink the lenders in spite of adequate Net Worth). Take the recent case of United bank of India, which has treated Kingfisher Airlines as a ‘Wilful Defaulter’.