What is Personal Loan

Personal loans are lump sum amounts that may be borrowed from a bank to meet the immediate needs of an individual viz. financing a marriage, buying a car, consolidation of a debt, any medical expense etc. This kind of loan does not require any form of security. Because of this feature, the interest rate charged on such loans are higher. In case of default in repayment, the lender may seek legal assistance to make reparations for the loss incurred. This type of loan takes the least amount of processing time where, post application for the loan, a credit worthiness check is carried out by the lender, prior to disbursing the loan amount and no personal questions regarding the end usage of the loan amount is asked. On an average a personal loan is sanctioned within 72 hours.

Why is it more Convenient to take a Personal Loan?

Personal loans are far more convenient than withdrawing from an individual’s stash of savings to finance a pressing need. It is easily processed, within a short time and has lower interest rates. Hence the most advisable way to approach is taking a loan against assets like gold, property or shares. Personal loans are no doubt the best choice for meting any situation like medical exigency, however it is unwise to apply for one in order to fund the borrower’s forth coming vacation plans.

Eligibility Criteria for taking a Personal Loan

Like most loans, personal loans majorly depend upon the take home money (salary or profit for the salaried and self-employed respectively), job security, residential location, credit history etc. The eligibility criteria are mentioned below (however, the list is not exhaustive, and is dependent on the lending authority the borrower is dealing with)

For SALARIED Individuals

  • Minimum age of applicant should be 21 years
  • Maximum age at loan maturity should be below 60 years
  • Minimum total employment duration must be 2 years with minimum period of 1 year of service at present organisation
  • Minimum income must be Rs. 10,000 per month (varies with the city in which the applicant is holding a job in)

For BUSINESSMEN and SELF-EMPLOYED individuals

  • Minimum age of applicant should be 25 years
  • Maximum age at loan maturity should be below 65 years
  • Minimum total business duration must be 5 years with minimum period of 3 years at present business
  • Minimum income must be Rs. 60,000 per annum

Applications may also be made with a co-applicant. Under such cases, the loan eligibility increases as the income of the co-applicant is also considered.

The loan range for personal loans generally varies between Rs. 50, 000 to Rs. 20, 00,000.

Documents Required

The under-mentioned list is for reference only. The requirements must be checked with the institution that the borrower is dealing with.

  • ID proof (Copy of passport/ Aadhar card/ Voter ID card/driving license etc.)
  • Proof of residence (Copy of ration card/ utility bill etc.)
  • Passport size photographs
  • Proof of income (ITR for last 2 years for self-employed individuals and salary slips of last 3 months (for salaried individuals)
  • Bank statement of salary account (last 3 months)
  • Proof of continuity in current job (Form 16/ Appointment letter)
  • Proof of qualification (highest degree or registration with professional council for professionals)

Advantages and Disadvantages of taking a Personal Loan

Advantages

  • Personal loans are sanctioned at the quickest pace varying between 24 to 72 hours on an average. Hence, they are best suited when funds are needed instantly.
  • Personal loans are highly flexible. Borrowers have multi-faceted use for them, ranging from financing their medical expense to funding their expensive holiday deals. The applicant is not questioned about the end use of the funds
  • Processing of personal loans is hassle free as they are free from detailed and lengthy documentation procedure.
  • Generally personal loans are unsecured and hence, in spite of a higher interest rate, do not require any guarantee or security. This is mainly because the loan tenure here is much shorter than home or car loans.

Disadvantages

  • The unsecured personals loans charge a high rate of interest. This is because this type of loan is free from the provision of any security.
  • Since personal loans do not involve tedious paper work, or declaration of end use of the fund, the lenders rely heavily on good credit rating of the borrower. Failing which, the application is rejected.
  • In case loan is sanctioned for a borrower with poor credit rating, lenders offer lower principal amount and higher interest in comparison with borrowers with good ratings. The repayment terms for the latter are also strict.

Interest Rates and Fees

The rate of interest generally varies from 12% to 24%, which is higher in comparison to other loans. In addition an interest processing fee is also levied on borrowers, payable at the time of processing the loan application. In case the borrower decides to prepay the loan a prepayment fee is also charged. Both the prepayment and processing fees are to the tune of 2% to 3%.

Deductions that can be Claimed

Section 24(b) of Income Tax Act, 1961 provides relief to people who avail of loans to buy or renovate property. In case a personal loan is taken and used as a down payment to purchase a property, the applicant can claim tax exemption. Even expenses for repair, renovation or reconstruction can be considered valid for tax deduction. There can be no claim on the principal amount of loan; however, the interest paid on the loan qualifies for tax deduction. All documents relating to purchase, and bills for material and labour need to be produced to claim the tax deductions.

Repayment Options

Personal loans are repaid in equal monthly instalments (EMIs) and the loan tenure varies from 1 to 5 years.