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Personal Loan

A type of an unsecured loan, a personal loan is where the entire risk is undertaken by the bank or credit lender. This implies that you do not have to give any guarantee or collateral for taking this loan. Just think about it, what if you need to finance a holiday, renovate your home, pay a medical bill or pay for your destination wedding, all of this is possible with extra money in your hand.

Recently, there has been a rise in personal loans among millennials. The reason being - increasing cost of living and accommodation. The other reason is that banks and lending institutions have simplified the process of lending, especially when it comes to verification, documentation and payment terms.

Keeping all things in mind, one should also remember that a personal loan comes with a very high rate of interest. So, it is better to think about your financial liability before borrowing a personal loan. Failure to pay back the loan can not only affect your credit history, but also downgrade your CIBIL credit score.

What does a Personal Loan Cover?

You do not need to have a specific requirement to avail a personal loan, it is a multipurpose loan which can be used to finance anything.

As mentioned before, a personal loan covers any of your personal expenses such as – finance, wedding, medical emergency, a foreign vacation, home renovation, lending it to a family member, education, repairing a car, household repairs, and personal business purposes and in some cases, paying off personal debt.

Features and Benefits of a Personal Loan

Mentioned Below is a List of Benefits of a Personal Loan.

  • Easy Documentation - With the advent of net banking and digitization, banks have developed the entire process of loan disbursal online and hassle free. Not only can you apply online, but certain banks already have pre-approved loans for salary holders.

  • No Security - A personal loan is an unsecured loan, and hence, there is no collateral or a guarantor required. It is issued on the basis of your income payback capacity and credit rating.

  • Flexible Loan Tenure - The loan tenure for a personal loan generally varies between 1 to 5 years. You are required to pay back the borrowed amount with interest every month in the form of equated monthly installments.

  • Rate of Interest - The rate of interest for a personal loan is fixed by banks. Furthermore, the rate of interest is also dependent upon your occupation, income, credit report and loan tenure.

  • Easy Loan Disbursement - If you have a good relationship with your bank and the bank feels that you have successfully maintained a sound financial history. The loan will be released as soon as possible without any delay.

  • EMIs - Equated monthly installments make it easier for you to pay back the loan amount. Ensure that you do not miss out any of the EMIs.

Types of Personal Loan

Listed below are a few types of personal loans in India:

  • Festival Loan - This is the most common type of personal loan in India due to the severe importance of festivals in India. Most of the banks offer festival loans for a small time duration with a lower rate of interest as the borrowing limit is generally low. This usually caters to meeting the expenses during the festive season.

  • Home Renovation Loan - One of the reasons why this type of personal loan is popular among the people is because they are entitled to a tax exemption up to ₹30,000. Also, home renovation usually takes place once in 5 years and this loan can help them avoid exhaustion of all of your existing savings.

  • Fixed Rate Loan - A type of personal loan where the rate of interest is fixed over the entire tenure of the loan. This allows you to determine the exact amount of EMIs you are liable to pay in the future. Also, there is no risk of paying a higher rate of interest which occurs when you undertake a floating rate policy.

  • Loan for Your Wedding - As the name suggests, a wedding loan is undertaken to meet all your wedding related expenses such as jewellery and designer wear. Since weddings in India are considered as a lavish affair, many couples decide to avail such loans.

  • Consumer Durable Loan - Given the rise of technology and millennial habits of staying up to date with the latest gadget trends, a consumer loan has come into play in order to enable millennials to purchase their favourite gadgets. Gadgets such as smartphones, home appliances etc. can be financed by consumer durable loans.

  • Holiday Loans - If you want to travel abroad for a vacation, this is the perfect loan to avail. Although it comes with a high rate of interest, such a loan is ideal for meeting your travel and holiday expenses. You do not have to worry about breaking your savings.

  • Business Loan - If you intend to start your own business or expand your current business, you can always avail a business loan. Such a loan is an unsecured one which does not come with any guarantee. The limit and eligibility of your loan amount is based on your income and credit history.

Eligibility for a Personal Loan

The eligibility criteria for a personal loan largely depends upon your income in hand and credit score. Additional criterion varies from bank to bank. Mentioned below is the mandatory eligibility criteria across all major banks:

  • Age Limit - The standard age limit is 21-58 years of age for a salaried person, while it stands at 25-65 years for a self-employed person.

  • Nature of Employment/Employer - This ranges from salaries, self-employed, government employed professionals. Additionally, if you are employed in a prime company with a high ranking credit rating, you are more likely to get a personal loan.

  • Monthly Income - This factor highly affects the limit of loan amount. Most of the major banks and lending institutions require a minimum of ₹25,000 per month as in-hand income, for issuing a personal loan.

  • Term of Employment - This means the number of years you have been stably employed. You require at least two years’ of work experience with proper income and one year from your current employer.

  • Credit Rating - A credit rating comprises of a credit information report and a credit score. These two factors help in evaluating your credit history and creditworthiness as a potential borrower in the eyes of banks. Also, having a higher credit score can enable you to get a higher loan amount or credit limit with favorable terms and conditions for a loan. A good score of 700 and above is preferred by most of the banks.

  • KYC - These include the basic ‘know your customer’ documents required for a personal loan. These are Proof of Identity, Proof of Address, age proof, salary slips, income statement, credit report, Income Tax Returns and Form 16. These documents are to be submitted along with the duly filled/signed loan application form.

Top Banks Providing Personal Loans in India

As mentioned before, the rate of personal loans vary between 10%-15% per annum and from bank to bank. Here are a few banks with their personal rate of interest as per November 2018.

BankRate of Interest
Axis Bank15%-24%
ICICI Bank10%-17%
HDFC Bank15%-20%
Kotak Mahindra Bank10%-24%
Yes Bank13%-16%
Tata Capital11%-19%
Bajaj Finserv12.99%
CITI Bank10.99%

How to Apply for Personal Loan?

In order to apply for a personal loan, follow the mentioned steps.

  • Check your eligibility criteria, especially your credit score and rating.
  • Visit your preferred bank or lending institution.
  • Apply for a personal loan application form.
  • Submit the necessary documents - KYC and income statements.
  • Post submission, the bank will check your CIBIL record and send the application for a physical verification at your mentioned proof of address.
  • The physical verification is not required in case you meet the basic criteria and the bank is satisfied with your eligibility.
  • Post verification, the loan amount will be transferred into your bank account.

Frequently Asked Questions

Why should I choose a Personal Loan?

A personal loan is a good option if you require extra money for meeting personal expenses, provided you can pay the loan back at an appropriate time. It is an unsecured loan which does not require a collateral or a guarantor. You can avail a personal loan for various reasons such as holiday, wedding, home renovation etc.

What is the right time to take a personal loan?

There is no right or wrong time to avail a personal loan. You can opt for a personal loan for meeting any of your financial needs. A personal loan is a multi-purpose loan.

How to get a personal loan with Low CIBIL score?

There are likely lesser chances for you to receive a personal loan if your CIBIL score is low. Other options include if you have a high salary or a stable income statement. Apply for a personal loan with a co-applicant, such as your spouse, who has a better CIBIL score than you.

How is the maximum EMI amount calculated?

A loan EMI is calculated on the basis of three parameters - loan amount, tenure and interest rate. You can calculate the maximum EMI amount from any of the EMI calculators available online.

Is there a prepayment penalty on personal loan?

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Do’s and Don’ts While Taking a Personal Loan?

A few do’s and don’ts to look into before taking a personal loan.

  • Select your preferred bank or lender carefully

  • Read all terms and conditions carefully

  • Do not borrow from friends or family members

  • Calculate and compare different interest rates being offered

  • Do not avail advance EMIs

  • Check the foreclosure conditions carefully

  • Check all other additional charges and expenses

  • Do not approach multiple lenders at the same time

Checklist for applying for personal loan

A few mentions to be considered before applying for a personal loan.

  • Duly signed and filled loan application form

  • Proof of identity

  • Proof of Address

  • Credit report

  • Bank or income statement

  • Latest salary slips and Income Tax Returns

  • Form 16

  • Passport size photographs

How to calculate EMI for Personal Loans?

A loan EMI is calculated on the basis of three parameters - loan amount, tenure and interest rate. You can calculate the maximum EMI amount from any of the EMI calculators available online.

How can you repay the personal loan?

You can repay your personal loan via equated monthly installments. Repayment often depends upon the loan tenure and rate of interest.