How personal loans work?

Personal Loan or Unsecured loan

An growing number of consumers, particularly the large-scale, take personal loans for their purchases. They also turn their transactions into equivalent monthly installments (EMIs).

Personal loans help families cope with any deficit, including the purchasing of a house or a vehicle or higher education for children or medical contingencies. There’s a drop in personal loans to better grasp them.

To what ends can it be used?

It can be used for any personal financial needs and is not used by the bank. It can be used to renew your residence, marriage costs, family vacations, education of your kids, the purchasing of newest technological devices or home appliances, unexpected medical expenses or any other emergencies. Personal loans are also useful to invest in companies, fix your car, buy new houses etc.

Criteria for eligibility

Although it varies from bank to bank, your age, occupation , income, ability to repay your loan and place of residence are the general criteria.

To make use of a personal loan, you must have a daily source of income, whether you are a salaried, self-employed, or qualified person. The eligibility of a person is also influenced by his organization, his credit history, and so on.

Full length of loan

It may be from 1 to 5 years or between 12 and 60 months. In case-by-case terms, shorter or longer tenures can be permitted, but rare.

Loan disbursement

It is usually disbursed to the lender within 7 working days of the loan application. Upon approval, you may receive a cheque / draft payment equivalent to the loan amount or automatically deposit the money into your savings account electronically.

How much could you borrow?

This depends usually on your income and depends on whether you are employed or self-employed. Usually, banks limit the credit amount to no more than 40-50 percent of the monthly income of your EMI.

Any current loans held by the borrower will also be weighed when calculating the amount of the personal loan. For the self-employed individual, the loan value shall be calculated on the basis of the income received in conjunction with the most recent accepted profit / loss statement, taking into account any additional liabilities (e.g. existing business loans, etc.).

Is a minimum loan amount available?

Indeed, although the exact amount varies from institution to institution. Some borrowers have set their personal minimum loan capital of Rs 30,000.

Which bank / financial borrowing institution?

It is good to compare the deals of different banks before you settle on one. Some main factors in determining a lender include interest rates, duration of loans, processing charges, etc.

How do banks determine the permissible amount of credit?

While the criteria for the loan penalty may differ from bank to bank, some key factors determining the maximum loan that may be sanctioned include your credit score, the current level of income and liabilities. High credit score (closer to 900) means that you have correctly serviced your past loans and/or credit card dues, making lenders feel safe to borrow, which will allow them to receive higher loans.

Your current revenue and liabilities (existing credit card duties, unpaid loans, current EMIs, etc.) directly affect your reimbursement capacity. If you are in a lower income or have large amounts of unpaid credit card bills or outstanding credit EMI, you are therefore sanctioned for lower personal credit amounts compared to those with higher revenue or lower financial liabilities.

Will I always choose a loan provider for the lowest EMI possible?

Low EMI offerings that usually result from a long repayment duration, low interest rates or a combination of both factors. Therefore, when you choose low EMIs, you can end up paying more interest on your lender. Use on-line resources such as the EMI calculator for personal loans to test your interest payment on your loan tenure and your repayment capacity before calling.

Council

As unsecured loans, the interest rate for personal loans is higher than for secured “home and car” loans. Many leading banks and NBFCs currently offer loans at a cost of 11.49 percent. Furthermore, the borrower’s rate depends on key factors, including equity, employment, loan and term, previous relationships (savings accounts, loans or credit cards) with the borrower, etc.

Extra fee payable

Yes. Apart from the interest owed on the principal amount, the demand for a personal loan is non-refundable. The borrower pays the processing fees, usually 1-2% of the loan principal, for all paperwork to be processed during the application process. This charge may be waived by the lender if you have a long-term partnership with him.

Fixed or floating rates of interest

The EMIs remain fixed for a fixed rate personal loan. Floating rate means that the EMIs tend to decrease as the balance formula for estimating interest payments on a personal loan is decreased. According to the new rules on marginal costs of funds, floating rates can be updated on a semi-annual or annual basis.

Difference from reduction to flat rate

As the name implies, the borrower only pays interest on the outstanding loan balance in the first case , i.e. the remaining balance after the main repayment was reduced. Under the flat rate case, the borrower charges interest during the loan term on the entire loan balance. The interest payable does not therefore decline even as the borrower makes daily EMI payments.

May I apply with my wife?

Yes, you can apply for a personal loan yourself (singly) or together with a co-applicant, who needs to be a family member such as your spouse or relatives. If you have a co-borrower, your payment is treated in higher income, which allows you to receive a larger loan. Be aware, however, that if you or the co-applicant have a poor credit history, the chances of your application for a loan will be low.

Prepaid credit

Yes, however, some banks only allow borrowers to prepay the loan after certain payments have been made. Some lenders do not accept partial payment in advance. Prepaid fees may be charged on the outstanding amount of the loan.

Key documents needed when requesting a loan

Although the paperwork requirements vary from financial institution to financial institution, some key documents you will have to submit your personal request for loans include:

• Income proof (slip for wage-earners / recently accepted ITR for self-employed) *
• Proof of contact documents
• Documents with evidence with identification
• Certified graduation / license copies (in the case of self-employed persons)

Repayment of the loan

They can be repaid in the form of EMIs by post-dated (PDC) cheques in favour of the bank, or through an E-Clearing Services (ECS) payment order.

Prepaid / foreclosure payments

If you decide to pay your loan prior to completion of its term, you will receive an additional charge, called an advance / advance charge / penalty. Usually, this penalty ranges from 1 to 2 percent of the principal remaining. Nevertheless, other banks charge a higher fee to repay a loan.

Distinction between payment of part, prepaid and preclusion

Part payment

This amount is less than the total amount of the loan principal and is made before the loan is due.

Prepayment

If you pay the loan partially before the EMI plan is due. The advance payment may or may not equal the total amount owing. Prepaid charges usually fall within 2-5% of the outstanding loan amount. In addition, many banks are not permitting advance payment / loan closure before a specified number of EMIs has been completed.

Preclosure

Means the complete payment of a personal loan before the end of the loan term. Including advance payment, preclosure charges range from 2-5% of the loan.

Process of loan approval

The approval shall be at the sole discretion of the loan sanction officer, whose decision shall be based on the criteria set by the bank / financial institution. It can take between 48 hours and about two weeks for the whole operation. Once all required documents have been submitted and checking process has been completed, the bank will disburse the loan, if approved, within seven working days. Maintain ready all required documents together with the PDC and/or the ECS form to avoid loan processing and payment delays.

Standard EMI default

If you miss your expected EMIs and are unable to make future payments, the lender will first attempt through settlements and recovery officers to recover the due amount. In the event that such attempts fail and your bank account has been reported as a default, the loan shows as a default on your credit report, impacting your credit value and makes it difficult for you in future to obtain credit and credit card approvals.

Tax advantages

While personal loans typically don’t have a tax benefit, you might be eligible for IT deduction under Section 24 if you take one for home renovation / down payment. Nevertheless, this tax advantage is limited to interest only, not the principal amount. You would also have to file sufficient receipts to demand the deduction.