Personal Loan Handbook: All Questions Answered

By BankBazaar | June 22, 2016
Personal Loan Handbook: All Questions Answered

What Is A Personal Loan?
(Let’s break it down for you)

Remember running low on pocket money as a kid and then cautiously approaching your dad or mum for a little bit more to tide you over for the month? Well, a Personal Loan works a little bit like that. Only, you will need to repay what you borrowed and a wee bit extra as ‘interest’. A Personal Loan provides you capital whenever you are in need of money. You can take a Personal Loan to pay for expenses arising out of a medical emergency, for higher studies or just to pay for a fancy vacation (we do not recommend the latter).

There is usually no condition imposed by the lender on the usage of funds. It is entirely at the discretion of the borrower. No questions asked by the bank. It’s for this very reason, a Personal Loan is also called an “All Purpose Loan”. Well, as long as you’re using those funds within the framework of the law, it’s all good. So, a Personal Loan to support your gambling habit or fund your brainwave to brew some moonshine in your backyard probably isn’t a good idea. We’ll tell you more about the common reasons people take a Personal Loan for in the next section.

Purpose Of A Personal Loan
(Just what on earth does one use it for?)

Personal Loans are usually taken to fulfil some kind of financial obligation or expense on the part of the borrower, or at times when funds are urgently needed.  Some of the most common causes for getting a Personal Loan are:

  • Paying off debts: One of the most common reasons to get a Personal Loan is to pay off existing debt or to consolidate multiple debt under one umbrella. Usually the borrower takes out a Personal Loan to pay off debts like Credit Card bills or other loans, and bring them all under one single loan at a lower rate of interest.
  • Marriage Expenses: This is a common reason for a Personal Loan since weddings are an expensive affair (especially if you’re the kind of groom whose shoes are constantly hidden away). Personal Loans are usually applied for by parents or young couples looking to cover the expenses of the wedding.
  • Family Holidays or Vacations: It is also commonplace to apply for a Personal Loan to cover expenses stemming from a big holiday. A Personal Loan allows individuals to make repayments over a fixed period of time at a lower rate of interest in compared to using a Credit Card. Tip: We don’t recommend taking a Personal Loan for a holiday – it isn’t the best financial decision you’ll make, believe us.
  • Household Appliances and Renovation: Personal Loans can also be taken to pay for big household expenses such as the purchase of furniture or expensive electronic items such as television sets, refrigerators, electric stoves etc. It can also be used to undertake renovations or major repairs around the house after you invited The Incredible Hulk to your last birthday party.
  • Health Expenses: The cost of healthcare is skyrocketing every year. You’ll be wise to ensure you have adequate Health Insurance. Nonetheless, people do take Personal Loans to pay for medical expenses and bills that need to be paid on an urgent basis.
  • Jewellery: In India, gold and other jewellery is seen as a long-term asset and are greatly coveted by a large section of the population. Many individuals take Personal Loans to purchase gold or gold jewellery in large amounts. Tip: Again, this is not something we endorse.

So if you’re thinking of a Personal Loan to pay off that hitman you ordered to take down Johnny Bravo, you might want to revisit that idea.

Features Of A Personal Loan
(What’s the fuss all about?)

Personal Loans, like onions in India, are always in great demand. If you meet the eligibility criteria and have all your documents in order, you can get a Personal Loan in a matter of a few days or even a few hours. Listed below are the features of a Personal Loan:

  • Collateral-Free Loan: You don’t need collateral to get a Personal Loan. Collateral is an asset pledged to a lender in exchange for a loan. This asset can be your house, car, bike, gold, or anything else of value. In the case of a Personal Loan, it is not necessary to secure it against an asset. You can rest assured that a lender isn’t going to demand you pledge everything short of a kidney and your first-born son as collateral.
  • Fewer Documents: You don’t need to submit a suitcase full of documents to get a Personal Loan. Just a few will suffice. If you have these few in order, getting a Personal Loan will be a piece of cake.
  • Quick Approval: If you visit your bank with a well-prepped file, you’ll get your Loan in no time. Personal Loans are disbursed faster than any other type of loan.
  • Cheaper than a Credit Card: Agreed, Credit Cards are a way of life but, often, taking a Personal Loan is cheaper than swiping your card as they carry lower rates of interest than Credit Cards.
  • Uniformity: Personal Loans are given most often at a fixed rate of interest and are to be repaid within a fixed time period. This ensures that your EMI amount remains more or less uniform. This will help you to plan your budget judiciously.
  • Easy Availability: Personal Loans are readily available. Not just banks but independent lenders give Personal Loans, too.

Eligibility For A Personal Loan
(Do you make the cut?)

You know you’re just right for a Personal Loan if you’re homely, domesticated and convent-educated. We’re kidding. Knowing the eligibility criteria before applying for a Personal Loan will help you avoid the possibility of rejection of the application on the grounds of eligibility. Moreover, if everything is in order, banks will be able to process your application faster and without a hassle. To be eligible for a Personal Loan, you must be:

  • A professional drawing a regular income or salary or
  • A self-employed individual

Here are the specifics:

SALARIED EMPLOYEE SELF-EMPLOYED
Should be at least 21 years of age Should be at least 24 years of age
Should be no more than 58 years on the maturity of the loan Should be no more than 65 years on the maturity of the loan
Earns at least 17,500 p.m. Earns at least 17,500 p.m.
Should have been at least 1 year with the current organization Should have been at least three years in the same profession

Once the above mentioned requirements have been met, the banks check your CIBIL Credit Score. To be eligible for a Personal Loan, you must have a minimum CIBIL Score of 750.

The general agreement is that any score between 750 and 900 is indicative of a good credit record.

Keep in mind, the eligibility requirements may differ from bank to bank. It’s always good to ask before applying.

How to Avoid Personal Loan Rejection
(Tips to get your loan application approved)

 Wear clean socks and don’t anger the bank manager by stealing his pen. While that advice might help to a very small extent, here’s what you really need to know: Frequent job changes, too many loans, a typo in your application and a missed call could spell trouble.

Lesser known reasons for a Personal Loan rejection include:

  • Job Hopping: Job stability is very important for your lender. Changing jobs every now and then might act as a deterrent during the approval of your loan.
  • Too Much Credit: You already bear the weight of too many loans on your shoulders. That’s a red flag for banks right there.
  • Typo Trouble: The bank verifies every little detail in your application. A typo causing your apartment number to change might just lead to a rejection.
  • Hello? You there?: You gave your home landline number for tele-verification. Unfortunately, you’re always at work when the bank calls. Provide your mobile number too.

Documents Required For A Personal Loan
(What you’ll need for a well-prepped file)

 Just like the eligibility criteria, the list of documents required to process a Personal Loan may differ from bank to bank. The following table lists out most commonly required documents.

SALARIED EMPLOYEE

Proof of identity

    • Passport
    • Driver’s license
    • Voter ID
    • PAN Card

Residence or Address Proof

    • Passport copy
    • Any utility bill such as electricity or water bills
    • Rental agreement
    • Ration card

Employment Proof

    • Certificate of employment from the current organisation
    • Appointment letter from the organisation
    • Certificate of experience

Proof of Income

    • Salary slips from the last 3 months
    • Form 16

Bank Statements

    • Last 3 – 6 months bank statements of the account into which the salary is credited

Proof of Investment

  • This includes any document showing proof of investment in shares, assets, fixed deposits etc., if any
    At least 2 passport-sized photographs
    Completed and signed application form with all the relevant details filled in

SELF-EMPLOYED

Proof of identity

  • Passport
  • Driver’s license
  • Voter ID
  • PAN Card

Residence or Address Proof

  • Passport copy
  • Any utility bill such as electricity or water bills
  • Rental agreement
  • Ration card

Proof of office address/ownership

  • Any property document
  • Bills relating to maintenance
  • Utility bills, such as electricity, water bills

Proof showing existence of business

  • Registration license of the business or company
  • Copy of tax registration
  • Saral Copy from the last 3 years
  • Shop Establishment Act

Proof of income

  • Income Tax Returns for at least last 2 years
  • Balance sheet
  • Documentation showing profit and loss
  • Any reports relating to audit

Bank Statement

  • Bank statement from the last 1 year of both savings as well as current account

Proof of Investment

  • This includes any document showing proof of investment in shares, assets, fixed deposits etc., if any
    At least 2 passport-sized photographs
    Completed and signed application form with all the relevant details filled in

And no, that little note beseeching your banker with “pretty, please” and signed off with “XOXO” isn’t going to get you anywhere. Save your ink.

Types of Personal Loans
(What’s on the menu?)

 Now that you’ve got the basics of a Personal Loan, would you like fries with that? It would only work to your advantage to know the various types of Personal Loans.

Personal Loans are of two types:

  • Unsecured Personal Loan
  • Secured Personal Loan

Unsecured Personal Loan

When a loan is given without collateral, it is called an unsecured loan. Most Personal Loans are unsecured loans. Another name for an unsecured Personal Loan is Signature Loan. Banks take into account a borrowers’ credit rating and income before approving an unsecured Personal Loan application. Repayment of an unsecured Personal Loan is to be made within a fixed period of time via fixed EMIs.

Secured Personal Loan

When a borrower pledges an asset to a lender in exchange for a loan, it becomes a secured loan. The borrower risks forfeiting the asset if he is unable to repay the loan money. The pledged asset is also called collateral. Though it’s not necessary to present collateral at the time of taking a Personal Loan, doing so can be beneficial to you. You can increase your chances of getting a Personal Loan by offering collateral. You could also be eligible for a bigger loan amount if you choose to put up collateral. We’re talking a house, a car, gold and so forth. So that re-gifted casserole as ‘collateral’ isn’t likely to score you any brownie points.

Differences Between An Unsecured And Secured Personal Loans
(Po-tay-to, po-tah-to?)

 Choice is a wonderful thing. Informed choice is even better. Knowing the difference between an unsecured Personal Loan and a Secured one will help you decide which to pick. The following table will help you evaluate the differences at a glance:

Unsecured Personal Loan Secured Personal Loan
Requires the borrower to have a good credit rating or CIBIL score in order to acquire the loan. Requires the borrower to provide some sort of guarantee or collateral to the lender in order to acquire the loan.
No collateral or guarantee required. Guarantee or collateral can be any asset such as a car, property, stocks etc.
Shorter tenures for loan repayment. Longer tenures for loan repayments.
Generally comes with a higher rate of interest. Has a lower rate of interest compared to an unsecured Personal Loan.
Not easily given to individuals with a low credit scores. Borrowers can compensate for a low credit score by offering security.

So, if you are looking for a bigger loan amount with lower interest, securing your loan maybe a good idea.  It can also help you make up for a poor CIBIL score.

What Loan Amount Can I Get?
(Here’s where we show you the money!)

 Personal Loans are available for as little as Rs. 10,000 and for as much as Rs. 50,00,000. The loan amount that an individual will be eligible for from a bank will depend on factors like income, existing loans and CIBIL Score, among others.

  • Salary or Income: What you want and what you get may not tally – meaning, the loan amount you apply for and the amount approved by the bank may differ. The amount a bank approves is contingent on your income/salary. Individuals drawing a smaller salary or income from business will get a smaller loan. Likewise, individuals with a higher salary or income will get a bigger loan.
  • The Company or Organisation of the Borrower: The brand value of your organisation can help you with your Personal Loan application. Individuals working for reputable organisations stand a better chance of getting a loan. Often, banks and financial institutions tie up with big banner companies and curate Personal Loans at attractive interest rates just for their employees.
  • Existing loans of the individual: Borrowers who already have existing loans are likely to get a smaller loan amount. An existing loan reduces the repayment capacity of the borrower. However, if the borrower has been making payments regularly and has the financial capacity to afford an additional loan, the banks might not lower the loan amount.
  • The CIBIL or Credit Score: The higher the credit score of a borrower, the better are the chances of getting a bigger loan. Generally, a CIBIL score of 800 and above will stand you in good stead. Keep in mind, a score of 650 or lower could shrink the size of your loan.

Interest Rates On A Personal Loan                
(That little extra you’ll have to shell out)

 There is no single rate of interest on Personal Loans. But there is a general range. Banks take into account multiple factors before deciding the rate they charge. Some of these factors are:

  • Borrower’s Income: This is one of the biggest criterion for deciding the rate of interest on a Personal Loan. The fatter your income, the better the rate of interest compared to those earning less.
  • Credit or CIBIL Score: The next important factor which influences interest rate is your credit or CIBIL scores. The higher the credit score, the more attractive the interest rates. Conversely, low credit scores send interest rates soaring.
  • Bank-Customer Relationship: Having a good relationship with your bank can be helpful when applying for a Personal Loan. This involves more than just saying, “Hello!” with a cheery grin. If you have a fixed deposit or a long-term savings account with a bank, you have a good chance of getting a Personal Loan at a favourable rate of interest. Paying your Credit Card dues on time can also work to your benefit. Therefore, it’s always good to first check Personal Loan interest rates at the bank you regularly transact with.

Personal Loan interest rates                           
(Looking for interest rates from popular banks? Well, then, knock yourself out!)

BANK NAMES INTEREST RATES
Aditya Birla Finance Personal loan 14.00% to 16.25%
Capital First Personal loan 13.00% to 20%
CitiBank Personal loan 12.75% to 15.75%
Fullerton Personal loan 19.50% to 37%
HDFC Bank Personal loan 12.75% to 20%
ICICI Bank Personal loan 11.49% to 17.50%
IndusInd Personal loan 12.99% to 19%
Kotak Personal loan 11.50% to 18%
Standard Chartered Bank Personal loan 12.50% to 17%
Tata Capital Personal loan 13.49% to 19.50%

Types Of Interest On Personal Loans
(What floats your boat?)

 Now you know all about getting a good rate of interest on your Personal Loan. With that done, let us tell you about two types of interest rate options. They are:

  • Fixed Interest Rate
  • Floating Interest Rate

Fixed Interest Rate: When you pay a uniform rate of interest on your loan for the entire tenure, it is called a fixed rate of interest. A fixed rate of interest is clubbed with a fixed payment tenure. This ensures that each instalment is of equal value, allowing you to accurately estimate future loan repayment amounts. The advantage of a fixed interest rate is that the rate won’t change regardless of whether the market goes up or down or sideways.

Tip: A fixed rate of interest is an advantage if the market rate is at an all-time low at the time of taking your loan. This means that even if market rates go up in future, you get to keep your low rate of interest for the full tenure of your loan and save some moolah!

Floating Interest Rate: A variable rate of interest is called a floating interest rate. Instead of a fixed rate, the interest rate changes multiple times through the loan tenure. While you may be paying a lower rate one year, the next year rates may change. A floating rate of interest means that the rate fluctuates up or down just like the rest of the financial market.

Tip: A floating rate of interest makes sense when the government decides to reduce the inflation rate. This is because when the government lowers inflation, interest rates decrease as well, so you stand to gain. When market rates are at an all-time high, a floating rate of interest would stand you in good stead. This is because when rates fall, your rate of interest will decrease as well. Phew!

Interest Rates For Self-Employed Individuals
(Because this is a special breed.)

 There are different factors which help banks determine interest rates for salaried and self-employed individuals. While salary and loan value play a large role in determining the interest rate for a salaried employee, there are many other factors to be considered for a self-employed individual. Some of the factors are:

  • Income and Size of the Company: It goes without saying (but we’ll say it anyway), individuals running a bigger business with more employees are likely to get a better rate of interest. Banks also consider the income from the business before deciding on a rate.
  • Business Health: While owning a big business definitely works in favour of the borrower, it needs to be profitable. Banks will look for a steady stream of income from the business.
  • Profession of the Individual: Yes, banks are partial to certain professions more than the others. Bankers’ pets include architects, surgeons, chartered accountants and doctors, who often get a better rate of interest than the others. Of course, there’s a reason behind this. Individuals in these professions generally earn more and are less likely to default on their payments.

Personal Loan Tenure Or Repayment Period
(How long is this going to take?)

Personal Loans in India are generally given for a short term. Compared with more conventional loans – like a Home Loan or a Car Loan — the repayment period for Personal Loans is relatively shorter. Most banks and financial institutions in the country provide Personal Loans with maximum repayment periods of 36 months or 3 years to 60 months or 5 years. The minimum tenure for repayment of a Personal Loan is 12 months or 1 year.

The tenure for Personal Loan repayment is determined by the following factors:

  • The maximum loan value applied for by the borrower
  • The number of Equated Monthly Instalments (EMIs) that can be made towards the loan
  • The rate of interest of the Personal Loan

Calculation Of Equated Monthly Instalments (EMIs)
(A little bit of Math never hurt anyone!)

 An EMI is the amount of money a borrower returns to the bank every month as repayment of his or her Personal Loan. EMIs are made up of the interest as well as the principal amount, and eventually result in full payout of the loan over a specified period of time. A borrower can calculate the EMI amount manually or by using an online EMI calculator. It is advisable to use an online EMI calculator as it is faster and more accurate than manual calculation (and BankBazaar’s EMI Calculator is just cuter, believe us).

Math class basics

The formula for calculating EMIs on a Personal Loan is [P x R x (1+R)^N]/[(1+R)^N-1] where:

P represents the Principal amount or the amount of the loan

R represents the rate of interest per month

N represents the number of instalments paid every month

Let’s try this with an example

A borrower has taken a Personal Loan of Rs. 10 lakhs at an interest rate of 14% for a tenure of 5 years. If you apply the formulae, the EMI should be Rs. 23,268. Confused? We told you it’s best to use an online EMI Calculator!

How Do I Use Online EMI Calculator?

Before you use an online EMI calculator, keep the following information at hand:

  • Total loan amount
  • Processing fee details
  • Rate of interest

Now, punch in all the information into the online calculator and let your computer do the hard calculating job. Along with calculating, your EMI the calculator will also provide details on loan amortisation, total interest charged and will project a loan repayment timeline. The details will help you make more informed decisions. It can also calculate your EMI in case of loan prepayment. Be sure of the amount you wish to prepay and within what time frame.

Benefits Of A Personal Loan EMI Calculator
(You can never have too much of a good thing)

 A Personal Loan online EMI Calculator provides many benefits to a borrower.

  • It is more accurate than manual calculations, which are subject to human error – remember NOT acing your Math exam?
  • It helps potential borrowers save time on calculation
  • It helps to quickly compare EMIs for different loans offerings
  • It helps you plan budgets based on the EMI calculation
  • You can re-adjust multiple parameters and redo calculations in seconds
  • EMI calculators factor in processing charges and other fees and, therefore, make for a more accurate calculation

In short, an online Personal Loan EMI Calculator can do everything short of fetching your slippers. That’s what a trained puppy is for.

Effect Of Personal Loan Tenures On Other Loan Parameters
(Sort of like El Niño, only nicer.)

 The tenure of a Personal Loan has an effect on other Personal Loan parameters, such as loan and EMI amount, interest rate, among others.

  • Personal Loan tenure is directly linked to the loan amount. If you opt for a longer loan period, you can borrow more. It is easier to repay the loan if the tenure is longer and it also reduces the chances of a possible default on payment.
  • The longer the Personal Loan tenure, the smaller is the EMI amount. A longer tenure allows the loan to be spread out over many more months. Conversely, a shorter tenure bulks up your EMI amount.
  • The tenure of a Personal Loan does not change the interest rate on a loan, but it determines the amount of interest you pay on a loan. As you keep paying off your loan, banks levy interest on the outstanding balance. This means, every additional year of loan tenure attracts more interest.

Difference Between Short And Long Tenure Personal Loan
(The long and short of it.)

 Short and long tenure Personal Loans have their own advantages and disadvantages. The table below lists out the differences.

Short Tenure Personal Loan Long Tenure Personal Loan
Overall interest paid on the loan is reduced or is generally on the lower side Overall payment of interest is higher due to the greater number of EMIs
EMI payments are bigger due to the short loan tenure EMI payments are smaller due to a longer loan tenure
Higher chance of defaulting on loan repayments. Ouch! Lower chance of defaulting on loan repayments

Personal Loan Amortisation
(We like big words and we cannot lie.)

 What is Amortisation?

Amortisation is payment of a debt or a loan within a fixed time period. Payments toward the loan are made in regular instalments within this time frame.

What is an Amortisation Schedule?

An amortisation schedule is a periodic table that shows the principal and interest component of an EMI. The table breaks up the principal and the interest amounts that go into making each EMI payment. In the early stages of loan repayment, EMIs largely comprise of the interest money. Gradually, with every subsequent payment, the interest component becomes smaller and the principal component bigger. The last line of the amortisation schedules shows total principal and total interest paid by the borrower for the complete tenure of the loan.

Amortisation Table

An amortisation table is a yearly record of the contribution a borrower makes towards his or her loan repayment. It breaks down the total yearly payment under the headings – total principal paid, total interest paid and a sum of the total principal and interest paid. The table also shows the outstanding loan balance at the end of each year of the loan tenure.

Using an example, we have illustrated an amortisation table below.

First, we used our cute online EMI calculator to determine the monthly EMI for the following details:

 Loan Amount: Rs. 10,00,000

Tenure: 5 years

Interest Rate: 15%

Processing Fee: 2% of loan amount

Using these parameters, our smarty-pants EMI Calculator reached an EMI figure of Rs. 23,790.

Following this, the amortisation table is drawn up showing the relevant figures for each year:

Year Principal Paid (A) Interest Paid (B)   Total Payment (A + B) Outstanding Loan   Balance
2016 1,19,467 1,18,432 2,37,899 8,80,534
2017 1,64,397 1,21,081 2,85,478 7,16,136
2018 1,90,824 94,653 2,85,477 5,25,311
2019 2,21,501 63,978 2,85,479 3,03,811
2020 2,57,107 28,372 2,85,479 46,702
2021 46,702 878 47,580 0

From the above table, we can see that interest makes up almost half of the payment amount in the first year. However, in the subsequent years, it is the principal amount that makes the bigger chunk of the payment.

Personal Loan Amortisation Calculator
(Works better than a crystal ball.)

 An amortisation calculator helps you work out your monthly loan repayment sum. It helps you understand what part of your EMI goes toward the principal payment and what part goes into the repayment of interest.

You simply have to punch in details about the loan amount, loan period and tax and insurance payments made by the lender into the calculator. The calculator will use this information to show how much money goes into repaying the principal amount each month. It’s really very simple, right?

How To Apply For A Personal Loan
(If you don’t have your genie standing by.)

 To get a Personal Loan, you can visit a bank or any other financial institution. A simpler way, and the next best thing to commanding a magical genie to do it, is apply for a Personal Loan online. Due to improvements in technology and banking services, applying for a Personal Loan has become a lot easier. Here are some of the ways to apply for a Personal Loan.

  • Online Application: Readily available Internet access and growth in smartphone usage has made banking as easy as a tap on your phone. You can download Personal Loan applications forms from the websites of banks and financial institutions, or fill them online. BankBazaar.com helps you fill in your Personal Loan application online and even submits it to the bank on your behalf. We’re nice like that.
  • Via E-mail: Some banks allow you to download the application form, but not upload it. In this case, you can e-mail your application to the bank, or write to them to request details about their Personal Loan offerings.
  • Via Customer Care: The customer care team plays a crucial role in helping you with all your banking work. You can also process your Personal Loan applications over the phone with a customer care representative of the bank.
  • Visiting a Branch: Sometimes, banks are just around the corner. Visiting a bank is the most traditional way to get a loan. This method can help you build a relationship with the branch manager. Who knows? You just might get that special offer before anyone else.

Applying For A Personal Loan Online
(All it takes is a few clicks.)

From groceries to movie tickets, you can get everything with a few taps on your smartphone screen or a few clicks of your mouse. Getting a Personal Loan is no different. All reputable banks and financial institutions operate websites where you can apply for a Personal Loan. Keep the following points in mind when applying for a Personal Loan online.

  • Check the eligibility criteria: Always read the Personal Loan eligibility section on the bank’s website before applying. You wouldn’t want to have your application rejected on the grounds of eligibility.
  • Documentation: If you meet the eligibility requirement, hop to the documentation section. Note down all the documents you will need to submit with your online application form.
  • EMI Calculator: Make use of the EMI calculator on the bank’s website to ascertain the total cost of getting a loan.
  • Check the Interest Rates: Check the interest rate offered by the bank to see if it fits your budget. 
  • Charges: Find out about any additional fees, such as a loan processing fee or any other charges. This will give you the exact amount you will have to return to the bank. Also, no surprise charges to disrupt your budget midway through the loan tenure.
  • Download the Application Form: Once all of the above steps have been completed, download the Personal Loan application form and fill in all the details.
  • Submit the Form: Sign your form and cross-check all the information. Ask a family member or a friend to double-check the form for any errors. Once this is done, scan the form along with the required documents and submit them online for processing and approval.

Tip: A simpler way to apply online for a Personal Loan is to use a website like BankBazaar.com that allows you to conveniently compare multiple Personal Loan offers from different banks, check your eligibility for free, and apply online for the loan of your choice within minutes. You’ll get all the information you need, including EMI amounts, loan details such as charges, documentation and so forth under the same roof. Sure beats browsing several different bank websites and comparing each offer manually, doesn’t it?

What Happens Next?
(A million dollar question? Not so much.)

 Once the application is signed, sealed and sent, (BankBazaar puts its magical elves to good use here), your application undergoes the following checks at the bank:

  • The bank runs a thorough check on all the information provided in the form. If any information or documents prove to be false, the application is immediately rejected. You can never be too careful!
  • Should the background and document check prove satisfactory, the bank will then take anywhere between 2 days to a week before approving the loan application. The time taken to approve Personal Loans varies from bank to bank.
  • Once the bank approves the loan, the money is credited to your bank account you specified on the application form.

Tips On How To Choose A Personal Loan
(You can thank us later!)

There are so many Personal Loan offerings out in the market that choosing one can become difficult. Here are some tips to help you with the process.

  • Credit Score: Get a copy of your CIBIL score or credit report before applying for a loan to ensure that there is no trouble later. If your credit score is low, it is advisable to wait and improve on it before applying for a Personal Loan. However, if your score is high, you’re a banker’s darling and banks will accept your application willingly.
  • Reasons For Applying: Though it’s not necessary to state the reason for taking the Personal Loan, doing so will work to your advantage. If your reasons are viable, the bank might just throw in a discount. And don’t we all love a good discount?
  • Repayment Capacity: Take stock of your finances before applying for a Personal Loan. Be sure that you will be able to make timely payments. Applying for a bigger-than-needed loan amount could increase the chances of a default in payment.
  • Loan Tenure: If you cannot bear the weight of a fat EMI, opt for a long tenure loan. More months to repay your loan will reduce the size of your EMI. Keep in mind, a longer tenure also means paying more interest. Therefore, it is important to find the right balance between all these parameters before signing on the dotted line.
  • Fees and Charges: It is advisable to find out about any potential charges or fees that the lender or the bank may levy at a later stages in the loan repayment timeline. This will help you circumvent any unnecessary complications or uncounted costs.

Relationship Between Personal Loans and Credit Scores
(Yes, it’s all connected.)

 As you’ve probably heard time and time again (and we’ve grown hoarse saying it so often), your Credit Score plays a big role in determining the outcome of a loan application. Essentially, a high Credit Score strengthens your chances of getting a loan approval vs. a low Credit Score. Banks generally consider Credit Scores in the range of 700-900 as good. A good Credit Score can also help you get a lucrative interest rate and a long loan repayment tenure.

Bad Credit Personal Loans

 A low Credit Score is an indication of a borrower’s bad credit history. This means the person might have defaulted on a payment on his or her Credit Card bill, loan or anything else. These are some of the causes of a bad Credit Score.

  • Missed or irregular repayments
  • Irregular or non-payment of bills
  • Failure of previous loan or credit applications
  • Zero credit history

Bad credit Personal Loans are advisable only when there are no other means to get funds. You should take this type of loan only under the following circumstances:

  • When you are in a position to make regular repayments
  • When managing other forms of debt becomes practically impossible
  • When debt consolidation is the need of the hour in order to reduce interest rates

No Credit Personal Loans

No Credit Personal Loans are offered by certain banks or lenders to individuals who have either a poor credit history or no credit history, whatsoever. In most cases, lenders of this type of loan will require you to provide just a proof of regular income to approve the application.

Features Of A No Credit Personal Loan

  • This loan is given irrespective of the borrower’s credit history
  • It is processed and approved faster than other loans
  • It has a flexible loan repayment period
  • It can be taken for large amounts
  • It is a collateral-free loan
  • Minimum documentation is required
  • It comes with an extremely high rate of interest

What is Pre-Approved Personal Loan?
(Receive before you ask.)

 A pre-approved loan is one where a bank or lender is ready to give you a loan for a certain amount without you having to ask for it. In this case, banks offer a loan for a certain sum, knowing that there is little chance of a payment default. Something like this could happen if you have a salary account or a long-term relationship with the bank and have always paid your dues on time. Having you as a customer allows the bank to assess your credit history and ability to repay a loan. Pre-approved Personal Loans are unsecured loans. Remember what those are?

Here are the benefits of a pre-approved Personal Loan

  • You are in an advantageous position due to the fact that the bank wants to offer a loan. This puts you in a better position to negotiate better terms with the bank
  • These loans generally have extremely low processing times
  • Since the bank is looking to convince you to take a Personal Loan, they might offer an attractive rate of interest
  • The loan can be repaid on easy repayments terms

 Tip: Rushing for a pre-approved Personal Loan may not always be a good idea. Don’t jump the gun. Compare offers across multiple banks, research thoroughly, and scrutinise the fine print before you make a move. Easy, tiger!

Prepayment Of A Personal Loan
(So you can get it over and done with quicker.)

 Personal Loans can be prepaid before the loan reaches the end of its tenure. There are two prepayments methods:

  • Full Prepayment: When you repay the entire loan amount long before the loan tenure ends, it’s called full prepayment. If full prepayment of the loan is carried out early on, then you can save a tidy sum on interest. Usually, prepayments on Personal Loans can only be made after the initial lock-in period of 12 months.
  • Part Payment: Part payment on a Personal Loan happens when you make a sizeable payment towards the loan, but have yet to repay some more money. Part payment can help in reducing your EMIs as well as the overall interest.

What Happens If I Default On My Personal Loan?
(All hell breaks loose. No, we are just kidding!)

You should make all amends to avoid defaulting on your EMI payments. But, in case situations spin out of control and a default occurs, stay calm! Panic will only put you in a tighter spot. The procedure for acting on a default will differ from lender to lender. But, looking at it broadly, here is how it will roll –

At first, your lender will contact you post a default. If you evade communication attempts from the bank, and more defaults ensue, you will be sent a legal notice. Moreover, a charge will be added to your balance loan amount for defaulting with payments. Remember, we asked you not to panic? Here is the solution.

How To Recover From A Personal Loan Default?
(Go incognito! NO, don’t do that!)

 No, this is exactly what we suggest you do not do. In case of a default, approach your bank. Explain to them your reasons. Yes, banks do accommodate legitimate concerns. You might be temporarily out of funds cause of health issues or loss of job or any other valid problem.

Ask your bank if they can restructure the terms of your loan. This can be done by extending your loan tenure or by discounting the interest rate on your loan. These measures will reduce the size of your monthly EMI and make loan repayment easy for you. When times get better, you can always opt to pre-closure your loan. In case you had taken loan against a collateral, the bank will seize the asset to make up for the dues.

Loan default also bring to mind the horror stories of debt collectors and their tactics from hell. If you are approached by debt collectors, do not send them away. Sit with them and tell them about your problems. Avoid getting into a heated arguments and reason out calmly. Do not get aggressive, but stand your ground. There are laws in favour of banks in case of defaults, and there are laws to protect you against unprofessional debt collectors.

Points To Keep In Mind
(It won’t hurt to write this down.)

 Getting a Personal Loan might seem as easy as one-two-three. To keep it that way, you must always remember the following points:

Fit The Bill: Banks don’t ask for collateral before giving a Personal Loan. This means you must meet their minimum income criteria. If you don’t, it is better to wait rather than have your loan application cancelled. Now, that’s a bigger setback.

Credit History: Banks like people with a good credit history. They gauge your ability to pay back the loan based on your Credit Score. Your score will tell if you have defaulted on too many Credit Card payments or other loan EMIs. Be responsible with your bills and improve your Credit Score before applying for a loan. This will reduce the likelihood of your application getting rejected.

Open An Account: You need to have at least one functional bank account in your name to get a Personal Loan. It’s even better if you have an account with the bank from which you would like to get a Personal Loan.

Lender’s Risk: Personal Loans are unsecured loans. The bank will have to bear the loss if you do not repay the loan amount. Don’t get any ideas! Defaulting on your loan will have serious repercussions on you as well – both legal and other. You might never get a loan again. Now, you don’t want that, do you?

A Personal Loan is your friend in need. It’s there to help you with all your financial problems, without asking questions. So, if you find yourself in need of a Personal Loan, don’t just pounce on the first offer that comes your way. Compare offerings from different institutions before you make a decision. Compare Personal Loans on BankBazaar from a host of banks. We are sure you’ll find your match with us. What’s more, our amazing customer care team is just a call away to hand-hold you through the whole procedure and do all the heavy lifting including paperwork assistance and follow-ups with the bank.

So that’s everything you need to know about Personal Loans. How about applying for a Personal Loan? Yes? Then throw your hands up in the air; wave them around like you just don’t care. No, just joking. See this nice, shiny red button below? It’s your golden ticket to the perfect Personal Loan for you with the best interest rates in town and pocket-friendly EMIs. Go on, click away – it’s free!

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.

6 thoughts on “Personal Loan Handbook: All Questions Answered

  1. AvatarTobias Armstrong

    I had no idea that there were so many things to consider when taking out a loan. I knew there was probably going to be a credit check, but that was about it. I guess I need to prepare myself a little better, especially if there’s going to to be a lot of different things going on while I’m trying to get approved. Thanks for taking time to walk through all of this with me!

    Reply
    1. AvatarTeam BankBazaar

      Hi Tobias,

      Glad we could be of help.

      Cheers!
      Team BankBazaar

      Reply
  2. Avatarlov kush

    hello sir
    i live in new delhi but i dont own a house .
    how can i open my bank account in new delhi .

    Reply
    1. AvatarTeam BankBazaar

      Hi Lov,

      You can use your rental agreement as proof of address to open a bank account in Delhi.

      Cheers,
      Team BankBazaar

      Reply
    1. AvatarTeam BankBazaar

      Hi there,

      Appreciate the feedback. Keep reading our blog for more on personal finance. Have a nice day!

      Cheers,
      Team BankBazaar

      Reply

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