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Think Twice

Author: Team Finapolis /Tuesday, February 23, 2010/Categories: Loans

Think Twice

If you are in need of money to fund your dream vacation, or are planning renovation of your home, or need urgent cash for wedding in your family, personal loan come handy to fulfilling all your immediate financial needs. A personal loan is called so because it is borrowed for personal need and the end purpose of the loan is not defined as it can be used to meet a variety of financial needs.
One of the biggest benefits of personal loan is that it is an unsecured loan, i.e.no security or collateral is required. There are though some PSU banks that may ask for a guarantor. Further, there is minimal documentation and speedy approval of your loan application by the bank/financial institution. Banks normally ask for documents such as your ID proof, residence proof, salary certificate or income proof or income tax return of the last two years along with your application for loan.
Normally, the term for personal is for a period from one year up to 5 years and the amount can vary from Rs 50,000 up to Rs 15 lakh and repay through easy monthly instalments. 

Are You Eligible?
One of the interesting things about personal loan is that there is no standard fixed interest rate. Each bank or NBFC quotes different interest rates to different borrowers depending on the borrower’s profile. The lender assesses borrower's income flow and his ability to repay the loan by checking his credit score and his financial background. Your financial background is a crucial factor for the lender to understand how much capable you are to pay back your loan. 
Your financial discipline in terms of paying back earlier dues such as EMIs and credit card bills on time also has a great say in determining the amount of the loan to borrow. The lender also determines interest rate and loan amount on the basis of the organisation the borrower is working for. If you are working in a government organisation or in a company that is in, what banks say, the A category, chances are that you would get a higher loan amount with lower interest rate than in case you are working for a B, C or lower category company, where the amount to be borrowed may be lower and the interest rate could also be higher. 
Category A includes top companies having good reputation in the market; Category B represents companies smaller than Category A; while Category C represents small companies. For instance, for category A and B companies, banks could charge interest rate of 15.50-15.75% if the borrower’s salary is above Rs 75,000 per month. However, for borrowers whose salary is below Rs 75,000 but not less than Rs 50,000, the interest rate could be a tad higher at 16-16.25%. The interest rate keeps on increasing along with the reducing salary base. 
Normally, for a self-employed professional he interest rate varies from 14.50 to 15%; for a salaried borrower 15.75 to 20%, and for a self-employed businessman it could be as high as 17.50% to 22%. The interest rate could be fixed or floating.
Another crucial determinant of the loan amount and interest rate is the credit score. If the borrower’s credit score with CIBIL is high, he is more likely to get quick approval for personal loan. If the credit score is low, chances are that his application would be turned down by the bank. 

Fine Print
If you’re planning to borrow personal loan, do it only when you have exhausted all other options i.e. when you are sure your friends and family are unable to help you financially. Secondly, before signing the loan papers, don’t forget to check your eligibility and credit score. Also, do compare interest rates, processing fees, prepayment charges and EMI outgo before zeroing in on a loan offer.
If you have a good credit score you can get in touch with as many banks as possible and try to negotiate a better deal. Since personal loans are unsecured loans like credit cards, they carry a higher interest rate compared to any other types of loan borrowed against collateral.
Also, if you are paying EMI on a running loan from any other bank, it could impact your loan eligibility and the bank may sanction you a lower amount than you actually require because you’re already having a loan liability.   
Another point to note is that many banks normally impose loan processing charge and pre-payment charge on personal loan that could range between 2 to 5% of the principal outstanding. Besides, there could be charges for late payment of EMI also that could go upto 24% per annum on the amount outstanding.
And last but not the least, don’t forget to read the Most Important Terms and Conditions (MITC) for personal loan from a bank and clear all your doubts before signing on the dotted lines.

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