A new laptop, latest mobile, the new TV, dream vacation. Personal loans can help meet all your financial needs effectively. Banks and financial institutions say Precious moments need to be cherished, without the worry of financial constraints. With simplified documentation and speedy approvals, availing personal loans is easy. Infact outside many office buildings I have seen people distributing pamphlets or flyers about personal loans.
Debt used to be a four-letter word in India. Gone are the days when our ancestors saved every penny they earned, lived within their means and considered debt as a shameful thing, to be avoided at any cost. Now everyone seems to be exposed to some or the other kind of debt. In fact, an average urban mass middle class person typically has four-five kinds of debts in his bag. The usual culprits are home loan, car loan, educational loan, some personal loan and credit card dues. People are working because they have EMIs to pay! Understanding Loans explained about the basics of loans such as interest rates, EMI, Credit history. Today we are going to talk about Online Personal Loans.
Table of Contents
What is Personal loan ?
Personal loan is given to individuals for their own personal expenses say for purchase of consumer durables. It is generally taken by borrowers who are looking for loans quickly and with minimum documentation. One need to specify the purpose for which one is taking loan so borrower can use the loan for any purpose they like. .
How much loan can you get?
Personal Loans can range from ten thousand to 30 lakh, based on the lender and the borrower’s ability to pay back.
What is the duration of a personal loan?
A personal loan is of a shorter duration, the duration is usually between one and five years. The repayment options are usually flexible and depend on the lender and the credit history of the borrower. One need not make any down payment (as in car loan or house loan) or provide a guarantee or collateral security (as in education loan). So it is an unsecured loan.
What are the interest rates for personal loans?
Interest rates for a personal loan vary from borrower to borrower & lender to lender, depending on their individual credit history and amount borrowed. Typically the factors that determine the Personal Loan interest rates are as follows:
- Income: How much one earns decides the interest rate.
- Company Status: Banks divide the companies into various categories CAT A, CAT B, CAT C, Non-Listed etc. If the company is a good interest rate is slightly better. Generally, the various categories are
- CAT A means Top 1000 companies
- CAT B Multi National Companies( MNC’s )
- CAT C means Small companies
- Non Listed means Smaller companies with 100 emloyees.
- Credit and Payment history : Banks follows Cibil scores or rating before deciding giving loans. If you have poor Credit Score, your application can be rejected or the Bank will give you at a much higher rate.
- The Bank : If you have Salary account or Savings account the bank might give some benefit in terms of interest rate or Processing fees.
- Negotiating Ability : one can always negotiate and can ask for Bank to give you waivers on Rates, Fees Etc
Sample interest rates as on Aug 2014 are given below. Found deals4loans webpage on personal loans a quick overview. Click on image to enlarge.
Personal loans interest rate
What are the fees and charges payable on personal loan?
Various types of charges that are levied are given below , though it varies from lender to lender.
- Processing fees : are charged on the loan amount and is payable upfront by the borrower, while filing the loan application. This is non-refundable and covers the costs of determining the loan eligibility of the potential borrower. It varies from half to 3% of the loan amount applied for. Some banks charge a flat fee.
- Pre-payment Fee: If the EMIs are paid before the tenure, banks will normally charge the borrowers a pre-payment fee which will be in the range of 2% and 5% of the outstanding loan amount. Usually, pre-payment is permitted only after a certain period of the loan disbursal.
- Charges for Late payment : If there is a delay in paying off the monthly EMIs, banks levy a late payment fee with the EMI. It usually is in the range of 2% and 3%
- Cheque bounce charges : If you have given post dated cheques(PDC) and it is not honoured by bank on account of insufficient funds, borrower is charged a penalty for cheque bouncing anywhere between Rs. 250 and Rs. 500.
Sample list of charges from ICICI Bank for personal loan (as on Aug 2014) are given below. Click on image to enlarge.
Personal loan charges : prepayment,late payment
How does one repay the Personal loan?
Repayment is done every month via EMIs. You have to pay fixed amount every month and have to submit post-dated cheques or you can mandate them to directly debit the EMI by ECS ( Electronic Clearing Services) with the Bank where you have an account. The repayment affects your credit history which affects your future capability of paying loans. Our article Understanding CIBIL CIR report explains CIBIL CIR report in detail. Interest rates can be calculated at a flat rate keeping the outstanding amount ( i.e. the amount on which interest is calculated) constant throughout the loan tenure or at a reducing balance rate, which lowers the outstanding amount as the loan is paid back. From our article Understanding Loans explains how method of calculation affects Total payment.
| Reducing cycle | EMI | Total payment | Interest outgo |
| Annual | 4,802 | 1,15,248 | 15,248 |
| Monthly | 4,614 | 1,10,736 | 10,736 |
| Daily | 4,535 | 1,08,840 | 8,840 |
What do lenders look for before sanctioning a Loan?
Your annual income, current EMIs, credit history of a borrower & his profile in terms of the company you work, are taken in to consideration when you apply for a loan. Since it is an unsecured loan, lenders specifically look at the repayment history and the credit score of a borrower. Eligibility Criteria for Personal loan from HDFC Bank is given below. Play around with the calculator for different options.
Eligibility criteria for Personal loan
Documentation required for personal loans
Typically the documents required are:
| Documents | Description |
| ID Proof | Passport Copy/ Voters ID card/ Driving Licence/Copy of PAN Card |
| Address Proof | Passport /Ration card/Voter’ss ID/Driving license/Last 2 month Electricity bill /Last 2 month Landline Telephone Bill |
| Financial Docs |
|
How long does it take for a loan to be sanctioned?
The time taken to disburse personal loans varies from lender to lender. Personal loans may be approved in as little as 24 hours or may take up to 7 business days.
What should one look out for before taking Personal Loan?
While applying for a Personal Loan,
- Make sure you borrow within your means. It affects your credit history and credit score
- Compare interest rates from different banks.
- Check the way EMI is calculated. Don’t choose a flat rate of interest. Always choose an option that calculates interest on the reducing balance method. Is it calculated on a monthly reducing basis (the moment you pay your principal, the following month’s interest rate is calculated on the reduced amount).
- Check for documentation, administration or processing fees, prepayment fees.
- Try and keep the loan term short, preferably 1-2 years.
When should one take Personal Loan?
Debt is debt. The only certainty of a loan is that it has to be paid back. Loans establish our credit history : good or bad. The trick is to only borrow what you need and what you can afford to pay back. Personal loans are one of the most expensive forms of loan available in the market. So some do’s and don’t of taking personal loans are. Our article Life of Debt – Responsibly talks about how to take loans
- Choose carefully after conducting due research and understanding of the cost & the benefits involved.
- Opt for personal loans only to meet your essential needs which cannot wait. It should be your last resort. Taking a personal loan for satisfying leisure needs can prove to be costly i.e. for vacation, buying a new gadget etc.
- There is an emergency and you need funds immediately. A personal loan can be taken because the processing time is much lesser on account of minimal documentation.
- If you have a very large credit card debt (interest on credit cards is usually between 2.5-3 per cent a month), you can take a personal loan to pay that off (interest on personal loans is between 1.5-2 per cent a month). But you shouldn’t use your credit card for the duration of the personal loan.
Related articles:
- Understanding Loans
- Credit Card Debt
- EMI and Amrotization Table Calculator
- FAQ on CIBIL CIR Report and Score
What are your views on a personal loan? Have you taken personal loans? How has been your experience been? Could you have avoided personal loan?
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Because when I visited bank they were giving me personal loans at 15%+ rates/
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Yes I agree with that personal loans can help meet all our financial needs effectively. Your post really give lots of information about personal loans, thanks for sharing it.
Yes I agree with that personal loans can help meet all our financial needs effectively. Your post really give lots of information about personal loans, thanks for sharing it.
great article.
“People are working because they have EMIs to pay!”
Yeh ..I have heard it so many times..I would have quit my job..(the manager sucks !) but I have to work as I have Car EMI/house EMI to pay!
great article.
“People are working because they have EMIs to pay!”
Yeh ..I have heard it so many times..I would have quit my job..(the manager sucks !) but I have to work as I have Car EMI/house EMI to pay!