One has surely heard the popular saying “The only thing predictable about life is its unpredictability”. Emergency needs are the norm in life. Renovation of one’s home and emergency hospitalization expenses have to be borne at the right time and personal loans help to tide over the crisis. Personal loans are just the right loan at the right time.
What is a personal loan?
Personal loans are unsecured loans given by banks and non banking financial institutions which allow the borrower to obtain funds without offering any security as a guarantee. These loans are available for both the salaried and the self employed. These kinds of loans as they are unsecured in nature offer a higher degree of risk to the lender. To compensate this risk the lender charges a higher rate of interest. A good credit history is a must in order to get these loans sanctioned. These kinds of loans are mainly used for foreign travel, marriage expenses, emergency hospitalization expenses, educational expenses and so on.
What is the criteria for obtaining a personal loan?
- This type of loan is generally availed by salaried individuals, self employed professionals such as doctors, engineers, chartered accountants, contractors and self employed non professionals.
- The minimum age for obtaining a personal loan is 21 years and the maximum age is around 58-60 years for a salaried employee. For a self employed individual the maximum age can extend up to 65 years.
- The minimum monthly income necessary to avail these loans from banks is in the range of INR 10000-15000.Some banks have a higher income criteria in the range of INR 20000-25000.The minimum monthly income is similar for both salaried and the self employed.
- The borrower needs to be in his or her current residence for at least a year. Certain banks specify a requirement of 2 years
- A salaried employee is sanctioned an amount in the range of INR 50000-INR 20 Lakhs. For a self employed individual the loan amount sanctioned is around INR 1 Lakh-INR 20 Lakhs. Loans will be dispersed in a time frame of 4-7 days.
- The tenure of a personal loan can be around 1-7 years.
- The processing fee is around 2-2.5% of the loan amount sanctioned.Pre payment charges are 4-5% of the principal amount outstanding and also depends on the lender, loan amount and the time period.
- A salaried employee should hold his current job for a period of 1-2 years. Certain banks ask for a confirmed employee status. The self employed individual should be in the current business for a minimum time frame of 1-2 years.
- The documents required for a salaried employee are an identity proof, photograph, pan card, residence proof, salary slip and form 16.For the self employed the last 2 years ITR,6 months bank statement ,proof of business, business profile, degree certificate,3 years CA audited balance sheet and a profit and loss account.
What are the interest rates charged for a personal loan?
The interest rates charged are generally in the range of 14-22% per annum for a personal loan. These loans are regarded to have an interest rate which is on the higher side.
What factors play an important role while taking a personal loan?
- The place of one’s residence plays a very important role while applying for a personal loan. It is easy to get the loan sanctioned if ones residence is in a metro city rather than in a not so well known town. The rate of interest as well as the due diligence may vary from location to location even within the same city.
- The Company one works and the job profile plays a very important role in getting the personal loan sanctioned. A person working for a reputed Company can get the personal loan sanctioned at a lesser rate of interest than one who works for not so reputed a Company .Even a lower designation in a reputed Company rather than a higher designation in not so reputed a Company means that a personal loan is obtained at a lower rate of interest.
- Credit history needs to be good while applying for a personal loan .Missed and delayed payments are frowned upon. A good credit history enables the sanctioning of a higher quantum of loan .It is a good idea to settle all pending EMI’s before applying for a personal loan.
- Always check for the loan processing fee, application fee, pre payment as well as foreclosure charges while applying for a personal loan. Check to see if the interest rates are fixed or computed on a reducing balance .If one opts for an annual reducing balance then the interest for the next twelve months is calculated based on the loan outstanding at the beginning of the year. In case of the monthly reducing balance interest is computed based on the reducing balance after each month.
- Personal loans should be used only for crisis and emergencies. These loans charge an interest rate in excess of 20%.The interest rates can be as high as 30-40% for credit card dues. Always check the interest rates while applying for a personal loan.
- Never take a personal loan to buy expensive electronic gadgets which are not a necessity or a priority and items for personal consumption. This will simply add to a heavy interest burden. Never take a personal loan for dabbling in the share market and for speculative investments as chances of a loss are high. Never think that default on the personal loan is the way out. Banks share credit information with Cibil, Experian and Equifax which are credit information Companies. A default might result in a rejection of more important loans such as a home loan at later points in time.
What are the advantages of taking a personal loan?
- It is very easy to procure a personal loan as they are unsecured in nature. This type of loan is sanctioned without collateral and can be availed within a couple of days on good credit history.
- Personal loans do not require a reason to be stated while sanctioning them. The amounts sanctioned can be used for any purpose. The money is spent as per the borrower’s needs and discretion.
- Getting a personal loan does not require verification of an asset or security as none is pledged.
- If one owns a house there is no need to pledge it as the personal loan is unsecured .There is no risk of the house being seized.
- Personal loans can be sanctioned for professional courses. These loans are mainly taken when one cannot obtain an educational loan. These loans are generally taken when the fees have to be paid in a hurry and proof of admission cannot be obtained on time.
- These loans can be used to retire costly debt. A loan taken on a credit card may have an interest rate as high as 40% per annum .Many people borrow huge amounts on their credit cards and pay only the minimum amount. This results in an accumulating debt. A personal loan can be availed to retire the principal amount of the credit card dues. Since a personal loan charges a lesser interest rate than the credit card interest rates this method makes sense.
What are the disadvantages of taking a personal loan?
- Since these loans are available rather easily there is a chance of the borrower going easy on debt. Debt is a burden and should never be taken lightly .One should not cultivate the tendency of taking a personal loan based merely on whims and fancies. This leads to a debt trap.
- Though a personal loan is available easily the interest rates are higher than some of the other avenues as this is an unsecured loan..Loans against fixed deposits are sanctioned against 80% of the value of the fixed deposit amount. The fixed deposit continues to gain interest as it is not liquidated. The interest rates are also lesser than a personal loan. Similarly loans can be taken against property, shares, PPF, Life insurance policies. As these are secured loans interest rates are lower.
- Taking a personal loan and not being prompt in repayment leads to a bad credit history. As these are unsecured in nature a default causes havoc with ones Cibil scores.
I would like to end this article stating that personal loans are an answer to a specific need. They cater to the borrower who requires an unsecured loan to meet an emergency expense. This loan should be used specially to meet only a crisis expense .One must be careful to avoid taking such a loan for personal consumption and falling into a debt trap.