Ways to secure a Covid-19 personal loan

The need of taking a personal loan has increased immensely facing many unexpected situations including job loss, pay cut or any medical emergency/treatment. Small businesses too have faced closures or less revenue generation due to the ongoing situation. Personal loans thus have emerged accessible to encounter any such instances. In the following article, we’ve talked about the steps of availing a personal loan including choosing a bank, interest rates to consider, documents to prepare along with many such relevant information.

Subas Tiwari

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.

Government banks (PSU Banks) have launched a very good initiative by offering personal loans for Covid-19 treatment. They have started a special project of unsecured personal loan. Under which, a personal loan of up to Rs 5 lakh can be taken to mitigate any such mentioned expenses or emergency cases. The interest rate for this category of personal loans is low. Generally, interest rates for an unsecured personal loan range between 11 to 17 per cent. Here, the interest rate is cheaper. The country’s largest bank SBI is offering this personal loan at 8.5 per cent. However, presently there is no uniform interest rates for Covid personal loans as different PSU banks ask different rates. Along with the lot, Union Bank of India and Canara Bank have also announced Covid personal loan, lately.

A person can take this personal loan for himself or for any family member from government banks. The loan can be availed for a period of up to 5 years which implies that the banks will have to repay the loan amount within 5 years. In recent times, we have seen a lot of people taking personal loans at a very high rate to meet Covid treatment. Here, the Covid personal loans come handy.

How to apply?

You need to visit a government bank branch and apply for this loan. Presently, this can’t be done online. Once you’re sure of availing this loan, know that there are two ways to go for the same. The first is- after hospitalisation. Once you’re hospitalised, you will need to visit the bank branch with the hospital bill and the bank will decide the loan amount based on your repayment capacity. Second is, the hospital gives an estimated amount of the treatment cost to the concerned person, which will have to be taken to the bank and apply for the loan. In this type, banks can give loans ranging between Rs 25, 000 to Rs 5 lakh. However, it is up to the bank authority to approve or reject your loan application.

Eligibility of personal loan

For salaried class

• Should be having an active 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 on priority.
• One should have a job of permanent nature. Banks would not give a loan to a person whose job is temporary or who has no means of regular income even though he may be owning movable assets.
• 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, Aadhaar Card, etc) and identity proof (employment ID card, PAN card, etc) copies should be produced duly self-attested along with bank application form and 2 photographs.
• Though the reason/purpose of the personal loan is not mandatory, the bank would like you to state some reason.
• If you already enjoy any other loan like car loan or home loan, those deductions will also be taken into account to calculate total deductions out of the salary and arrive at eligible loan amount.
• Your CIBIL score (see box) will also play a significant part in 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 per cent 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 and can be different among private banks (private banks commute on the take-home pay).

For self employed

Certain additional conditions may apply for geek employees, individuals who run their own business or freelancing assignments in availing a personal loan from a bank. Since he does not get salary, the business income as reflected in the Income Tax Return would be the basis of ascertaining his total income. S/he may be required to submit details of his enterprise.

The performance of the business can also be a factor to influence his loan sanction. In 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 organisation.

The following could be additional conditions to be fulfilled.

• The attested copy of their Qualification would be required to be submitted alongwith the application form.
• Since some of the banks have specialised personal loan scheme 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 and foremost benefit is the quickness with which the loan application is either sanctioned or disposed off (rejected). The icing in 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 unless you have less than the minimum prescribed years of service or your take-home pay is lesser. So, it is advantageous for the loan-seeker, as he need not be under any obligation to his office colleague/friend into requesting 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 and 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 (ECS) and act on them.

Disadvantages/limitations to the consumer-borrower

• The rate of interest is the highest for this type of loan. Due to its unsecured nature of the loan, interest rate is on the higher side. Whereas 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 is having 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 lakhs 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.

Do not make these mistakes while taking a personal loan

One should be very careful in taking a personal loan as its interest rates start from as low as 11 per cent, which is very high. Higher interest rate can weaken your financial position. Let us know how to take a personal loan. What is its process and what precautions should be taken while taking personal loan?

• Be careful in choosing lenders-banks and NBFCs market personal loans very aggressively. Everyone claims at least the interest rate. But do your research. One can check this by visiting some bank branches or on loan aggregator websites to find out who is offering the lowest interest rate personal loan.
• Avoid flat rate. Banks claim to give loans at flat rates. But don’t fall for the flat rate. This is a strategy to mislead the customer. The flat rate does not tell you how expensive your loan is.
• Personal loans can be for a tenor of one to five years. Usually, while giving a bank or NBFC loan, it is seen that your EMI does not exceed 40 to 50 percent of your monthly salary. Let us now see what precautions should be taken while taking a personal loan.
• Avoid Zero Percent EMI. Banks offer loans with the lure of zero percent EMI. But in the name of processing fees and file charges, they charge a substantial amount. If you take a loan of 50 thousand for a period of six months and pay a processing fee of Rs 2 thousand on it, then your interest rate falls to 14 percent, not 12.
• Find out other charges. There is a fee for processing a personal loan. It is one to two percent. You will think it is not much. But many banks also charge foreclosure charges. That is, if you get the money and you repay the loan ahead of time, then foreclosure fee is levied. Find out about it.
• Take care of credit history. While sanctioning a personal loan, banks also look at your credit history. Many times, if you go to more banks or NBFCs, then you are considered more needy. This has a negative effect on your credit history. It is better that you find out the interest rate through the loan aggregator website or portal before visiting several banks or NBFCs to find out the personal loan interest.
• First of all, decide what your real need is. Accordingly, decide to take a loan.
• Find out how much loan you can get. For this, you can visit any bank branch or you can find out from the bank’s online loan eligibility calculator. Banks like HDFC Bank offer personal loans up to Rs 40 lakh.
• Find out the EMI of the loan you want. This can also be ascertained from the existing EMI calculator on the bank site. Or you can get it calculated from the bank branch.
• You can apply for personal loan directly by visiting the bank branch. You can apply for a personal loan through net banking, online app or ATM.
• After this, the documents have to be submitted. In these, salary slip as income proof or income tax proof for self-employed people is required. Address proof, identity proof document or self-employed people also have to provide proof of degree or license.