A personal loan is a type of unsecured loan meant to meet your current financial shortcomings. This type of loan doesn’t require a collateral or security. Unlike other loans, this gives you flexibility to use the money as you please. Personal loan is your instant solution to emergency money. It can be used for taking vacations, weddings, personal expenditure, medical emergencies and such situations.
Before sanctioning a personal loan, the person’s age, monthly income, loan repayment capacity are taken into account. You need to have a regular source of income, whether from a salary or from your business, to avail this loan. The credit history and existing loans are checked before sanctioning.
The duration of a personal loan is 1-5 years. In certain cases it can be extended or made shorter, but such cases are rare.
Usually the loan in sanctioned within 7 working days of applying. Once approved, the money is handed over in the form of a cheque or draft; or directly deposited in the lender’s savings account.
This process can take anywhere between 2 days and 2 weeks and is completely at the discretion of the loan sanctioning officer. Once sanctioned, the loan amount is disbursed within 7 working days.
The money is loaned in such a way that the monthly EMI subsequently is not more than 40-50% of the lender’s salary. The loaned amount depends on whether the lender is on a salaried job or self-employed. The minimum amount that can be loaned is Rs 30,000.
Before zeroing in on one bank, it’s better to check the offers from other banks and compare interest rates, tenures, processing fee, etc. Cross-checking will ensure you get the scheme best suited to your requirements.
Depending on high credit scores, the bank decides the maximum amount to be loaned. If you credit score is between 750 and 900, it means you’re credit card dues are clear and no loan repayment is pending. In such a case, the bank classifies you as a safe lender and allows you to borrow higher amounts. At the same time if you have unpaid credit card dues and belong to a low income bracket, then you are not eligible for a loan of a higher amount.
The loan can be applied jointly with either the spouse or parents. If applied jointly, then it is put in a high income bracket, enabling the lender to avail a loan of higher amount. However, if the co-applicant has a low credit score, it can affect the loan application and there are chances of the application not being approved.
Lower EMI amount doesn’t necessarily have to be an advantage. It depends on the loan tenure and interest rate. Due to a combination of these factors, it is possible that you’ll end up paying a higher interest rate in pursuit of low EMI amount. Thus choose your scheme carefully to avoid inconveniences in the future.
As personal loans are unsecured loans; the interest rate is generally higher as compared to those of secured loans such as home loan, car loan, etc. Some leading banks provide loans at interest rates as low as 11.5% but again it depends on factors like income level, credit score, etc.
In addition to the interest on the principal amount, a processing fee of 1-2% is generally charged on the principal. This goes towards all the paperwork that needs to be processed for sanctioning of the loan. If the lender has a long standing relationship with the bank, then this processing fee is generally waived off.
There are two types of interest rates to choose from- floating interest rate and fixed interest rate. The fixed rate doesn’t change during the tenure of the loan and the EMIs for each month remains fixed. Floating rates, on the other hand, are changed on a half-yearly or annual basis, based on the reducing balance method of calculating interest.
The loan can be paid through either EMIs or through post-dated cheques. Pre-paying the loan is possible but different banks have different condition. Some banks allow pre-payment only after a certain number of payments are made. Other banks allow the lender to pre pay the loan only if the full amount is being paid back.
Banks charge a foreclosure fee for paying off the loan before the tenure is up. This charge is usually 1-2% of the outstanding principal. Certain banks charge a higher fee for foreclosure.
Credit Card Loan vs Personal Loan
Both credit card loan and personal loan are unsecured and availed on the income level. But in case of credit card loan, you only approach the bank that issued the card and have to abide by their interest rates and repayment plans.
A personal loan, on the other hand, can be obtained from any lender and the lender can choose which interest rate and repayment scheme suits them best.