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.
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.