A personal loan is an unsecured loan for which one does not require any collateral or security or pledge. It is a hassle-free way to meet short-term or medium-term expenses such as renovating your home or temporary financial needs, without preconditions.
Since personal loans are unsecured in nature, interest rates could be on the higher side compared with other loans but are far lower than on credit card and easily repaid in equated monthly instalments (EMI) over a short period. Many people make the mistake of running up big credit card outstanding for planned expenses (wedding, renovation, travel).
There is often a high penalty if you do not pay your dues or EMIs on time. The interest rates for personal loan (from banks) are about 9.90% to 31.5%, while the same for credit card range from 15% to as high as 42%. Having said that, if you opt for a personal loan from lenders other than banks, then be ready to pay interest rates as high as those for a credit card.
For obtaining personal loans, you need minimal documentation and if you have a good credit score, it gets processed fast and, in a few hours, the loan amount can get credited in your account.
Interest Rates on Personal Loan
EMI on a Personal Loan up to Rs1 Lakh for a Three-year Tenure
Data compiled by BankBazaar.com as on 14th January from respective banks’ websites. EMI range is indicative only and not exhaustive.
Approval is not guaranteed for a personal loan, even if it is an instant personal loan. Your application is subject to an approval and verification process and will be processed if you meet the lender’s eligibility criteria, like credit score, repayment history and income. There is usually a flexible tenure that ranges from a few months to five years.
The first and most essential step is to assess your repayment requirement. The amount you borrow should be enough to meet your requirement, but your ability to service it and make timely payments based on your income is crucial. It is advisable to plan well, because repeated borrowing could significantly affect your credit score and history.
The amount of loan one can avail depends on one’s employment history, repayment capacity, income level, profession and credit history. It is advisable to check your eligibility before making a formal application to avoid rejection.
Eligibility Criteria for a Personal Loan Depend Mainly on:
Good Credit Score
: Credit scores are offered by agencies like CIBIL and range between 300 and 900 points. A score of 750 or above is considered ideal and most personal loans are approved for applicants having such a score
Debt-to-income Ratio: This is the proportion of your income or earnings that goes into repaying your total debt liabilities. This is as important as the credit score since it would mean precious little if you have a high credit score but do not have surplus money to repay your EMIs. Ideally, the debt-to-income ratio should be less than 40%.
You can then use any online EMI calculator to estimate your monthly loan repayments for making an informed decision.
Also remember, each lender will have its own criteria and terms and conditions (T&C) for granting a personal loan. So do check this before applying.
Some lenders set age limits to restrict funding to those near their retirement age.
Cost or Charges: Many loan agreements have hidden costs that are often visible only after the loan is approved and disbursed. Aside from interest costs, a personal loan also includes other charges such as processing fee, foreclosure fee (i.e., if you want to pre-pay / foreclose your loan), late payment fee, taxes and other charges. It is best to note down all the charges and costs that will be incurred, and then compare it with that of other lenders.
Whether you are getting your personal loan via an agent or applying for it yourself, make sure you read the fine print. Many a time, there are details given in fine print that you need to be careful about and may overlook in the hurry to get the loan approved.
- Proof of income (salary statements, income tax returns);
- Proof of residence and identity proof;
- Certified copy of your degrees and licence (for self-employed applicants);
- Last six months bank statements;
- Processing fee cheque;
- Latest salary slip (for salaried employees).
Once you finish doing this, you can apply for a personal loan with the chosen lender online from the bank's website, or by visiting a branch.
It is extremely necessary to follow the process and take a loan only as per your requirement and repayment capability so that your application is processed successfully and quickly. Choose a loan-provider who is flexible and accessible.
You can avail tax benefits on a personal loan, provided you abide by a few rules which are mainly linked to the end-usage of the funds. You can read more about it here