Consolidating debt: Personal loans offer the opportunity to consolidate high-interest debts, like credit card balances, into a single loan with a more favourable interest rate. This simplifies the repayment process and makes it more affordable.
Emergency funding: Personal loans can be a lifeline for unexpected expenses such as medical bills, home repairs, or car repairs, providing quick and flexible financial support during emergencies.
Major purchases: Whether it’s a new car, a home renovation, or a wedding, personal loans offer a means to finance significant purchases, spreading the cost over manageable repayment terms.
Education expenses: Personal loans can assist in covering education-related costs, including tuition fees, books, and living expenses, ensuring that individuals can invest in their education without immediate financial strain.
Business initiatives: Personal loans can be a source of capital for entrepreneurial ventures, whether it’s starting a new business or expanding an existing one. This financial support can be crucial in realizing business aspirations.
With so many lenders willing to serve inclined customers both online and offline, seeking personal loans is now relatively easy to get. Typically, lenders only necessitate a handful of fundamental documents, such as proof of income and employment, for the approval of a personal loan.
Nevertheless, the accessibility of these loans should not encourage potential borrowers to accumulate debt recklessly. Personal loans can come with significant costs, varying by lender, underscoring the importance of gathering information to make well-informed decisions.
Are you eligible for the loan?
The eligibility criteria for securing a personal loan in India can vary across lenders, but the majority typically include the following basic requirements:
Age: Borrowers are generally expected to fall within the age range of 21 to 65 years.
Income: Most lenders set a minimum monthly income requirement, often around Rs. 25,000.
Employment: Borrowers are typically required to be employed by a reputable company for at least two years.
Credit score: A good credit score is commonly necessary, with a score of 750 or above considered favourable.
Debt-to-income ratio: Lenders assess your debt-to-income ratio, calculated by dividing your monthly debt payments by your monthly income. A ratio of 50 per cent or less is generally deemed good.
Loan eligibility is determined by various factors, including age, income, employment history, credit score, and debt-to-income ratio. When applying for a personal loan, lenders often request the following documents:
Identity proof: Aadhaar card, PAN card, or driving license.
Income proof: Salary slips, bank statements, or income tax returns.
Employment proof: Employment certificate or offer letter.
Bank statements: Statements covering the past six months.
While some lenders may require collateral, such as a fixed deposit or a gold loan, many also offer unsecured personal loans that do not necessitate collateral. To gauge your eligibility, you can use a personal loan eligibility calculator or contact a lender directly for a discussion on your eligibility and available loan options.
Is there any loan collateral involved?
In India, personal loans are classified as either secured or unsecured. For the unversed, collateral including fixed deposits, a gold loan, or a property, is required to secure secured personal loans in India. In the event of a borrower default, the lender has the authority to seize the collateral to recoup the loan amount.
Collateral is not necessary for unsecured personal loans, implying that the lender assumes a higher level of risk. Consequently, interest rates on unsecured personal loans are generally higher compared to secured personal loans.
The specific form of security or collateral demanded for a secured personal loan is contingent upon the policies of the individual lender. To enjoy the advantages of secured loans, individuals can provide any of the following as collateral:
- Fixed deposits
- Gold loans
- Property
- Vehicles
- Investments
Rate of interest
The yearly interest rate for a personal loan in India may range from 9.99 per cent to 44 per cent, contingent on factors such as the lender and the borrower’s credit profile. Many lenders provide the option of both fixed and variable interest rates for personal loans.
Fixed interest rates remain constant for the entire loan duration, ensuring a predictable monthly interest payment.
Conversely, variable interest rates can change during the loan term, leading to potential fluctuations in your monthly EMI payments based on the prevailing interest rate.
Certain lenders might extend preferential interest rates to individuals with high credit scores or those employed by specific companies. Additional factors, such as the loan amount and repayment tenure, may also influence the interest rate. Before selecting a personal loan, it is crucial to compare interest rates across various lenders. Thoroughly reviewing the loan agreement is equally important to comprehend all terms and conditions, including the specifics of the interest rate.
Consider the following strategies to secure a lower interest rate on a personal loan:
- Enhance your credit score.
- Explore and compare interest rates offered by various lenders.
- Inquire about potential discounts with lenders.
- Evaluate the option of having a co-signer.
- Opt for a smaller loan amount.
- Select a shorter repayment tenure.
What would be the loan tenure?
The loan tenure for a personal loan in India varies among lenders, with the maximum and minimum durations subject to individual policies. Typically, though, most lenders provide loan terms spanning from a year to 84 months.
If you choose to repay the loan before the agreed tenure concludes, certain lenders may impose a prepayment penalty. This penalty usually constitutes a percentage of the remaining loan balance. As an illustration, a lender might levy a prepayment penalty of two per cent on the outstanding loan balance if the loan is repaid within the first 12 months.
The repayment conditions for a personal loan may differ among lenders. Nevertheless, the majority of lenders provide adaptable repayment choices, including monthly equated monthly installments (EMIs), quarterly EMIs, or semi-annual EMIs. Additionally, you may have the flexibility to select a repayment date that suits your preferences.
Should you have reservations about meeting the monthly EMI obligations, there might be room to negotiate a more extended repayment period with the lender. It’s crucial to note, however, that this extension could result in a higher total interest payment over the loan term. Before finalizing a personal loan agreement, it is imperative to engage in discussions with the lender regarding prepayment charges and repayment terms. This proactive approach ensures a comprehensive understanding of the overall loan cost, facilitating the selection of a loan that aligns with your financial circumstances.
Consider the following suggestions when negotiating prepayment charges and repayment terms with a lender:
- Be prepared to explore other options. If the lender is unwilling to negotiate, be ready to seek alternative solutions elsewhere.
- Compare offerings from various lenders. Shop around and assess prepayment charges and repayment terms from different financial institutions to make an informed decision.
- Demonstrate flexibility. While you may not secure all your desired terms, be open to compromise. Aim for a negotiated agreement that is fair and mutually beneficial for both you and the lender.
Fees and associated charges
The processing fee for a personal loan in India usually falls within the range of 0.5 per cent to 2.5 per cent of the loan amount. Alternatively, certain lenders may impose a fixed processing fee, irrespective of the loan amount. Beyond the processing fee, there could be additional concealed charges linked to a personal loan, including:
Prepayment penalty: As previously stated, certain lenders impose a prepayment penalty should you choose to settle the loan before the agreed tenure concludes.
Late payment penalty: The majority of lenders apply a penalty for late payments in the event of EMI defaults.
Documentation charges: Some lenders may levy a fee for processing your loan application and handling documentation.
CIBIL report charges: Certain lenders may require a fee for accessing your CIBIL report.
Insurance charges: Some lenders may mandate the purchase of loan protection insurance, contributing to the overall cost of the loan.
Thoroughly review the loan agreement to comprehend all terms and conditions, encompassing processing fees and any concealed charges. Additionally, inquire with the lender about any fees that may not be explicitly outlined in the loan agreement. Consider the following tips to steer clear of concealed charges on personal loans:
- Compare personal loan options from various lenders to pinpoint those offering the most competitive interest rates and fees.
- Thoroughly examine the loan agreement before signing to ensure a clear understanding of all terms and conditions, encompassing processing fees and any concealed charges.
- Inquire with the lender about fees not explicitly outlined in the loan agreement.
- Steer clear of obtaining a personal loan from a lender with a negative reputation.
On the surface, personal loans might seem like a convenient method to accumulate debt, but their complexity goes beyond initial impressions. The accessibility of loans should not prompt unnecessary enthusiasm, as it’s crucial to recognize that a loan is a financial liability that requires eventual repayment. Settling a loan with a high-interest rate or an extended tenure can impede your capacity and commitment to build the necessary wealth for your future.
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Updated: 11 Nov 2023, 01:08 PM IST