Overview

Personal Loan is a short to medium term unsecured loan, which does not require any collateral/security for disbursal. They are generally disbursed in a few hours to a few days with minimal or no paper work at all. A key feature of personal loan is its flexible end-use. Thus, this unsecured loan can be used to meet a variety of needs ranging from emergency medical expenses to planned expenditures such as home renovation, wedding, etc.

Eligibility

A personal loan as the name suggests is provided to individuals and not businesses. Most banks and NBFCs (Non-Banking Financial Companies) offer personal loans to both salaried and self-employed individuals/professionals. The eligibility criteria for a personal loan vary slightly depending on the type of applicant. Following are some of the key personal loan eligibility factors that need to be kept in mind

Particulars	Salaried	Self-Employed
Age	21 - 60 years	21 - 68 years
Minimum Income	Rs. 15,000 per month	Rs. 5 lakh per year (gross)
Employment stability	Total experience- Minimum 2 years Experience in the current organization- Minimum 1 year	Minimum 2 years in current business

The personal loan eligibility criteria mentioned above are generic in nature and actual eligibility factors will differ from one lender to another.

Work Flow

Personal loans are unsecured credit with flexible end-use that typically have a tenure of 12 months to 60 months. If a shorter tenure is chosen, individual EMI amounts are higher, while a longer tenure results in lower individual EMIs. The following are the key features of a personal loan

Key Features

No Collateral/Security Required	You don’t need to provide any collateral such as house or car to avail a personal loan. The loan is approved only on the basis of your creditworthiness, which depends on your credit score, income, repayment history, employer reputation, etc
Flexible End Use:	Unlike a car loan or home loan, personal loans can be used for multiple purposes, such as to meet expenses of a medical emergency, travel, house renovation, debt consolidation, etc.
Flexible Tenure:	Personal Loans come with flexible tenure usually ranging from 12 months to 60 months.
Minimal Documentation:	You can apply for a personal loan online and even offline with minimal documentation. Key documents that lenders generally need the applicant to provide include a proof of identity, a proof of address and a proof of income.
Quick Disbursal:	Personal loan disbursal can happen within a period as short as a few hours, once the application is approved. Turnaround times can also be as short as a few minutes, if you are able to avail a pre-approved loan offers.
Flexible Loan Amount	The eligible personal loan amount is based on an individual’s repayment history, monthly income, age, profession, employer reputation and other such factors. Lenders offer personal loans of amount as low as Rs. 10,000 to as high as Rs. 40 lakh

Personal loan interest rates differ from one bank to another. The rates are also affected by application based factors, such as credit score of the applicant, quantum of loan and tenure.

Interest Rate Comparison

Bank Name	Interest Rate
State Bank of India:	9.60% onwards
HDFC Bank:	10.75% onwards.
Punjab National Bank:	8.8% onwards.
Citibank:	9.99% onwards.
Bajaj Finserv	12.99% onwards
ICICI Bank	11.25% onwards
Bajaj Finserv	12.99% onwards
Tata Capital	10.99% onwards

The following is a comparison of the personal loan interest rates of some leading banks and NBFCs in India*:

EMI Payment Comparison of Reducing Balance vs. Flat Rate

In the following table, we have compared the EMI payable with reducing balance and flat rate methods of interest calculation over various tenures, interest rate and loan amount:

Personal Loan Specifics	EMI for Reducing Balance Method	EMI for Flat Rate Method	Interest savings over loan tenure*
Rs. 50,000 @ 10% for 3 years	Rs. 1,613.	Rs. 1,806.	Rs. 6,919.
Rs. 1 lakh @ 14% for 5 years	Rs. 2,327.	Rs. 2,833.	Rs. 30,390.
Rs. 2 lakh @ 16% for 4 years	Rs. 5,668	Rs. 6,833	Rs. 55,933
Rs. 1.5 lakh @ 15% for 1 year	Rs. 13,539	Rs. 14,375	Rs. 10,035

Some Facts

Which documents are required to apply for a personal loan?

The documents required to avail a personal loan vary from lender to lender. However, most of the banks and NBFCs require a proof of identity, a proof of address and a proof of income.

How should I choose the best personal loan offer?

With a plethora of personal loan offers available, choosing the best one can be challenging for some people. But worry not and follow the below tips to choose the best personal loan offer:

Compare interest rates: Do not go for the first offer that comes your way. Always compare personal loan interest rates offered by different lenders before choosing a deal.Compare other loan fees and charges: Do check the associated loan charges and fees before settling for an offer as they might affect your budget despite a low rate of interest.Check for repayment flexibility: Check for prepayment and part-payment options and the associated charges to better plan your repayment schedule. Calculate EMI payout beforehand: Before you apply for personal loan, you need to be sure that you will be able to repay the loan on time without any penalties.

How can I avoid personal loan rejection?

While getting a personal loan application approved completely lies in the hands of the lender, the below steps can be followed to avoid rejection:

Carefully check the eligibility criteria set by the bank/NBFC and ensure you meet them.Check for inaccuracies in your credit report as they might affect your credit score and hence your chances of getting a personal loan. Click here to check your credit report with Paisabazaar for free.Reduce your outstanding debt by paying any existing loan installments and credit card dues.Keep your credit utilization ratio below 40%.Avoid multiple loan applications at once.Must Read: 6 Common Reasons For Personal Loan Rejection

How can I bargain for a better rate of interest on my personal loan?

You can get a lower rate of interest on your personal loan by following the below tips: Maintain a good credit score as it is suggestive of financial stability and repayment capability. Higher the credit score, greater are the chances of availing a personal loan at a lower rate of interest.Apply for loan at a bank with which you already have a savings account or fixed deposit. Good pre-existing relationship with the lender has a positive impact on your repayment ability, which may help you to get a loan at a lower rate of interest.Banks and NBFCs often release special personal loan offers during festive season. These offers generally have an attractive rate of interest. Thus, applying for a personal loan during the festive season may help you get a loan at a lower rate of interest.

What is the impact of GST on personal loans?

The impact of GST on personal loans has not been much as it is not levied on EMIs. However, the service tax has increased from 15% to 18%. As a result, the one-time costs including processing fee, prepayment charges, etc. will rise.

Frequently Asked Question After AppliedLoan

What will happen if I don’t pay a personal loan EMI?

Missing a single EMI might not have a major impact on your credit score, however, missing multiple EMIs will. Repeated failure will not only affect your credit score but also increase your outstanding debt. In rare cases, preliminary notices can be sent by the lender mentioning the outstanding loan amount and penalty charges. The bank may also go for legal proceedings or approach the guarantor (if any).

What are the pros and cons of personal loan balance transfer?

It may happen that you took a personal loan at a higher rate of interest because you needed the funds immediately. However, you later find that other lenders are offering a lower rate of interest. In such a case, personal loan balance transfer is the most effective way to reduce your burden.

Are personal loans tax exempted?

As per the Income Tax Act, there is no specific deduction allowed for personal loans. However, if you are taking a personal loan for house renovation, you can claim an exemption up to Rs. 2 lakh on the interest component of the personal loan as per section 24(b) of the Income Tax Act.

What do the terms settlement, default and closed mean with respect to a personal loan?

You may come across terms like settlement, default or closed with respect to your old or current loans/ credit cards while going through your credit report. These terms are in fact not specific to a personal loan and their meanings are as follows:Settlement: This means that you were unable to pay off the loan amount. As a result you and your lender came to an agreement to pay only a portion of your dues instead of the entire outstanding amount. As much as 30% to 40% of your outstanding loan may be waived off by the lender as part of the settlement process. This should however be used as a last resort as it has severe adverse effect on your credit report.Default: This means that you have defaulted on your loan, i.e., you have not paid your outstanding loan. Additionally, you and the lender were unable to come to an agreement regarding the outstanding dues. This is the worst possible outcome of taking a loan as it impacts your credit score severely and most lenders will deem you a risky borrower in the future.Closed: This means that you have successfully paid off your loan. A successfully closed loan account helps maintain a good credit score and represents you as a low risk borrower to prospective lenders

What does prepayment mean and are there any charges for it?

When a borrower pays off the loan amount before the designated due date, it is called prepayment. Yes, many banks and NBFCs charge a prepayment fee ranging from 1% to 5% on the outstanding principal amount of the loan.

What do partial prepayment and foreclosure mean?

Partial prepayment or part prepayment means when you pay off a part of your loan amount in advance, while foreclosure is when you completely pay off the loan amount before the due date.

What are the advantages of part prepayment and foreclosure?

Despite the associated charges, loan prepayment is an economically viable option. If you completely pay off/ foreclose the loan in advance, you save substantially on the interest component. Additionally, your outstanding debt decreases.On the other hand if you partly prepay the loan amount, you can choose to either reduce your EMI payout or the loan tenure. Moreover, the part prepayment also helps you save on the interest component and decrease the outstanding debt.

Can I cancel a personal loan after the loan amount is disbursed?

In some cases, you may cancel a personal loan after disbursal subject to terms and conditions of the lender. Loan cancellation will lead to cancellation charges and processing fee. Please note that all banks do not allow loan cancellation once the amount is disbursed. However, you can always prepay the loan amount as per the terms and conditions of the bank and save on the interest component.

What is a top up loan?

Top-up loan refers to the second personal loan that can be taken over an existing personal loan. The second loan can either be used to consolidate debt or to meet a new requirement.

Is personal loan taxable?

No. You do not have to pay additional tax if you get a personal loan. In fact the interest payable on a personal loan may be eligible for tax deduction u/s 24b if you use the loan proceeds for the purpose of home remodeling/renovation.

Can I transfer personal loan to another person?

Under current regulations it is not possible to transfer your personal loan to another person. However, some lenders do have the option of having a co-borrower/guarantor for a personal loan and in such cases, the co-borrower/guarantor will be required to repay the loan in case the primary borrower defaults!

EMI Payment Comparison of Reducing Balance vs. Flat Rate

Personal Loan Specifics	Reducing Balance Method	Flat Interest Rate Method
EMI for Reducing Balance Method	EMIs are calculated only on the principal amount outstanding after each prior payment.	EMIs are calculated on the original amount borrowed, i.e. the entire loan principal.
EMI for Flat Rate Method	Individual EMI payouts decrease with each successive EMI payment.	Individual EMI payouts remain unchanged over time.
Interest savings over loan tenure*	Total experience- Minimum 2 years Experience in the current organization- Minimum 1 year	Minimum 2 years in current business

Required Documents

Identity Proof	PAN Card/ Voter’s ID/ Aadhaar Card/ Passport/ Driving License
Address Proof	Bank Account Statement/ Aadhaar Card/ Lease/ Property purchase Agreement/ Utility Bill (not more than 3 months old)/ Passport/ Driving License
Income Proof	For Salaried Individuals: Salary Slip/ Bank Account Statement/ Form 16 For Self Employed: Previous Year ITR/ P&L Statement and Balance Sheet/ Bank Account Statement
Business Proof	Certificate of Practice/ Partnership Deed/ GST Registration and Filing Documents/ MOA & AOA/ Shop Act License

Loan verification

The verification process for a personal loan involves the following key steps:

• Step 1: Once you have submitted your online application , your chosen lender receives your online loan application.


• Step 2: Subsequently, the lender’s representative will call you to verify application details and arrange for pickup of documents required for your loan application.


• Step 3: Once the documents have been collected and successfully verified, the personal loan application is approved.


• Step 4: Loan is disbursed once the applicant signs the loan agreement.

Disbursment Process

Once your personal loan application is approved and the loan has been sanctioned, disbursal occurs in one of 2 ways:

Option1. Direct transfer of funds to a savings/current bank account specified by the applicant

Option2. An account payee cheque draft sent to the applicant’s mailing address by postCurrently the 1stoption is more commonly used as disbursal is quicker and there is no risk of a cheque/draft getting lost in transit by post.

Some Factors

The main factors affecting the disbursal limits of personal loans include the following:

Income of the applicant – higher income level tends to increase the disbursal amount

Current EMI payable – higher EMI payouts typically decrease the disbursal amount

Number of dependents – higher number of dependents usually decrease the disbursal amount

The list of factors impacting disbursal limits of personal loans mentioned above is not exhaustive and there may be others that impact the disbursal decision made by lenders.

Different Ways To Pay Loan EMI

Timely EMI payments of your personal loan are essential to ensure that you maintain a clean credit history and good credit score. There are multiple ways you can pay your loan EMI:

• â–º Standing Instructions – You can use NACH mandate to set up standing instructions
• â–º Autopay – You can use internet banking to set-up autopay for EMI payment
• â–º Online Transfer – EMI payments can be made online using NEFT, RTGS, IMPS payments
• â–º Cheque/Draft – Post-dated cheques (PDC) or drafts can also be used to pay your PL EMIDo keep in mind that the different EMI

payment options mentioned above may or may not be available in case of your lender.

Some Facts

Why should I apply for a personal loan?

You should apply for a personal loan because of the following reasons:
No collateral needed: A personal loan is an unsecured loan, so you do not any collateral/security to avail a personal loan.Flexible end use: Unlike a car loan or a home loan, a personal loan can be used for various purposes, ranging from medical emergency expenses to home renovation.
Minimal documentation: The documentation process to avail a personal loan is far simpler and faster that the process to avail a secured loan.
Debt consolidation: You can consolidate multiple loans and/or credit card dues by taking a personal loan. This will not only make debt repayment easier but will also help you to save on interest payout.

What is the minimum salary required to get a personal loan?

The minimum monthly salary requirement to avail a personal loan varies from lender to lender. However, it generally ranges between Rs. 15,000 and Rs. 25,000 per month.

What is the best credit score or CIBIL score to get a personal loan?

Credit score is a 3-digit number that ranges between 300 and 900. It serves as a measure of creditworthiness and financial health of an individual. Thus, higher the credit score, greater are the chances of getting a personal loan approved. Generally, a credit score of 750 and above is considered good. You can improve your credit score by paying credit card bills on time, decreasing your outstanding debt and maintaining old credit card accounts in good standing.Read more about: CIBIL Score for Personal Loan

What role do credit history and score play in getting a personal loan?

Your credit history and credit score reflect your handling of credit in the past. Hence, they not only affect the chances of being approved for a personal loan, but often impact the rate of interest too. Higher the credit score, greater are the chances of approval and receiving a lower preferential interest rate.

Can I get a personal loan being a pensioner, if I have a pension account with one of the leading banks in India?

Yes, you can get a personal loan even as a pensioner, if you have a pension account with one of the leading banks. However, you should ensure that your bank offers personal loans to pensioners and you meet the eligibility criteria as specified by your prospective lender.

Can a student apply for a personal loan?

Generally, students are not eligible for a personal loan as a stable source of income and a good credit score are necessary pre-requisites. However, if you have a stable monthly income and fulfill the lender’s other eligibility criteria, you may easily avail a personal loan.

What is the minimum score to get a personal loan?

It depends on the eligibility criteria set by the lender. Most lenders do not specify a minimum credit score for a personal loan. Some lenders might lend money to applicants with low credit score (less than 750) but the interest rate applicable is usually higher in such cases.

Can I get a personal loan if I have a home loan?

Yes, you can apply for a personal loan even if you already have a home loan. However, the chances of getting the loan approved will depend on your repayment capacity, which in turn depends on your monthly income and credit score.

Can self-employed individuals apply for a personal loan in India?

Yes, self-employed individuals like businessmen, doctors, chartered accountants, etc. can apply for a personal loan in India provided they meet the eligibility criteria. Moreover, some banks and NBFCs provide special personal loan offers for doctors, chartered accountants and businessmen.

Can I get personal loan without a salary slip?

Yes, you can get a personal loan without providing salary slips. You can submit your bank account statement/ a copy of Form 16/ employee certificate from the employer, etc. as a proof of income to fulfil the eligibility criteria. However, it is always recommended to confirm the list of required documents with the lender as it may vary from one bank to another.

Can I use a personal loan for marriage purpose?

Yes, you can avail a personal loan to meet marriage related expenditure as personal loans come with flexible end use. Some lenders even provide personal loans specifically named as wedding/ marriage loans.

Can I take a personal loan from two different banks at the same time?

Yes, you may avail a personal loan from two different lenders at the same time. However it is not advised to do so, as it will not only affect your credit score but will also increase your EMI payout. It will be better to take one personal loan of a larger amount than two personal loans of smaller amounts. This way you can pay lower EMIs for a longer tenure and also improve your credit score. Moreover, you will save upon processing fees and other loan related charges.

Which is better, a personal loan or a credit card?

Both personal loan and credit card are means of borrowing money. Which one is better depends on the purpose behind borrowing money. If you need to borrow a fixed amount for a finite period of time, go for a personal loan. On the other hand, if you want revolving credit for lifetime, go for a credit card.Read more about: Credit Card vs Personal Loan

Is it good to pay off credit card debt with a personal loan?

Yes, it is often a good idea to pay credit card dues with the help of a personal loan as: It allows you to consolidate the debt associated with multiple credit cards, which in turn will make the repayment process easier.The rate of interest applicable on a personal loan is lower than that applicable to the outstanding balance on a credit card. Thus, taking a personal loan also helps you save on the overall interest cost.

What is the difference between reducing balance rate and flat interest rate?

In case of reducing balance method, interest is applicable on the outstanding loan balance i.e. on the balance that remains outstanding after getting reduced by the principal amount repaid. As a result, the interest cost keeps decreasing over the loan tenure. On the other hand, flat interest rate is charged on the entire loan balance throughout the loan term. Thus, the interest payable does not decrease over the loan tenure.

Should I always choose the lowest possible EMI before accepting a personal loan offer?

Low EMI offers are a result of either low interest rate or a long repayment term and sometimes both. Thus before selecting a personal loan offer, you should consider both interest rate and loan tenure. It is possible that the lender offering the lowest EMI is also offering the longest tenure, which in turn may increase your total interest payout. On the other hand, a personal loan offer with a relatively higher EMI but a shorter tenure may actually prove more economical in terms of total interest paid. Thus, you should always calculate your total interest payout and also take into account your repayment capacity before selecting a specific loan offer.