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What is a Personal Loan?

Last Update Date : September 27, 2018

personal loan - a borrower's guide

A personal loan is a type of loan which you can avail to fulfil your personal needs which require financial support. You can get such loans from a banking institution or non-banking financial company. This guide by H&R Block India will help you become a smart borrower.

Benefits of a Personal Loan

A financial crisis can occur to anyone. No matter how financially well placed you are, there is a constant risk of a financial disaster to some extent. Therefore, it is important for you to have a financial backup. It may not completely eliminate the risk but certainly can mitigate it. However, if a crisis does occur, a personal loan can be a lifesaver for you. This is just one of the many benefits a personal loan offers. It has several other benefits like:

  • Easy access: The biggest advantage of a personal loan is that it easily available. It is offered by almost every bank and banking financial company. You can avail it for any small or big financial requirement at a reasonable interest rate.
  • Minimal documentation: Most people avail a personal loan to meet small financial goals like buying an electronic device like mobile or television, meet the deadline to pay insurance premium or school fees, to pay security money while renting a house, to afford a much needed vacation etc. For such needs, people need small loans. These small personal loans do not require too much documentation, guarantor or security. Hence, you can avail a personal loan with minimum documentation.
  • Quick loan approval: Digitisation in the banking sector has sped up various processes including personal loan approval. Today, you can a loan request online from home or anywhere and get the approval in just one or two working days.
  • Flexible quantum and tenure: Unlike other loans, personal loans offer great flexibility when it comes to the amount which can be borrowed and the time frame one requires to repay it. Many banks offer personal loans ranging from Rs 10,000 to Rs 15 lakh catering to a variety of financial needs of the customers. Customers also get time from 12 months to 60 months to repay the loan depending on the quantum of the loan.

Tax Benefits of Personal Loans

Personal loan itself does not come with tax benefits. The tax benefit actually depends on the purpose for which you use the loan. If you use your personal loan for construction, reconstruction or repair of a house property, then you can get tax deductions under section 24, section 80C and section 80EE. Similarly, if the loan is used to meet business expenses, a tax deduction can be claimed on interest payment.

How can H&R Block help you?

In some cases, you can enjoy tax benefits on your personal loan, but you might fail to claim the tax benefits in the absence of proper knowledge and procedures. So, you should take help of tax experts for this job. Saving taxes and filing income tax return accurately becomes very easy when you have professional help. This is where we come into the picture. You can either use our intuitive tax filing platform to file your tax return easily or let our tax experts file it for you. We have a team of in-house tax experts who can file your tax returns accurately while giving you maximum tax benefits.

Different Types of Personal Loans

On the basis of various characteristics, a personal loan can be divided into various types.

1. Personal loan in case of low CIBIL score

Generally, people with low CIBIL score do not get a loan easily. However, some banks may offer a secured personal loan. They may also approve the loan if your income has considerably increased recently. The rate of interest for this type of loan is high.

2. Business start-up loan

Banks give such a loan to SMEs & start-ups. Average interest charged by banks is between 7.9% & 19.9%. However, banks do not charge any interest for the first 15 months.

3. Same day loans

Generally, loan approval takes 2-3 days. However, a few banks offer personal loans which are approved within 24 hours. If you find yourself in urgent need of cash, you can opt for this loan. The only drawback of same day loans is the high interest rate.

4. Loans for unemployed

Some government NBFCs provide a personal loan to unemployed individuals. In most cases, these loans do not require any security or collateral. The interest rate of these looks is on the higher side.

5. Government loans for small-scale businesses

To help small-scale businesses, the government offers a personal loan through some govt. banks & NBFCs at low interest rates under various govt. schemes.

6. Small business loans for women

Some banks & NBFCs offer exclusive loans to women entrepreneurs to promote self-dependency among women.

7. Corporate loan

Many banks offer both secured & unsecured loans to businesses or industrial houses.

8. Home improvement loan

Various banks offer loans in the name of repair, renovation & furnishing of the house. Most of the banks offer loans covering 90% of the cost while some even cover 100% of the cost. Interest rate generally varies from 9% to 12.5% p.a. This type of loan should not be confused with a home loan on which one gets tax deductions. Since the home improvement loan is considered a personal loan; it does not provide any tax benefit to the borrower.

9. Medical loan

People who require money for funding medical expenses like hospitalisation, surgery etc. can apply for a medical loan. There are a few financial institutions which provide these loans without any security & lend up to Rs 25 lakhs. However, the best way to tackle medical emergencies is by buying health insurance plan as it can help you save tax.

10. Marriage loan

You may be unaware but mainstream banks also offer personal loans for funding marriage related expenses. However, you should be very careful while opting for such a loan as the interest rate can be as high as 34%.

Personal Loan Eligibility Criteria

Various banks and NBFC’s offer personal loans to all applicants fulfilling their basic eligibility criteria. While different banks have different minimum eligibility criteria, the criteria common for most banks and NBFCs for individuals requesting a personal loan include:

Particulars Salaried Self-employed
Age (min-max) 23 years to 58 years 28 years to 65 years (25 years for doctors)
Income Rs 17,000 (Rs 25,000 for metro-cities) Minimum turnover of Rs 40 lakhs for non-professionals

Minimum turnover of Rs 15 lakhs for professionals

CIBIL score Above 750 Above 750
Minimum loan amount Rs 75,000 Rs 75,000
Maximum loan amount Rs 20,00,000 Rs 15,00,000

Documents Required for Personal Loan

The number and type of documents required for personal loan application varies from bank to bank. However, barring a few documents, the requirement is generally the same. So, you can refer to the list of documents below to see the minimum documentation requirement for personal loan.

Documents Required Individuals Firms, Partnerships
Signed Application Form Required Required
Identity Proof PAN card, Passport, Driving License, Aadhaar card, Voter ID, any ID card issued by the Govt. PAN card, Passport, Driving License, Aadhaar card, Voter ID, any ID card issued by the Govt.
Certificate and Proof of Business Existence PAN , Sales Tax/ Excise/ VAT/ Service Tax registration, copy of partnership deed, trade license, certificate of practice, registration certificate issued by RBI, SEBI
Address Proof passport, driving license, voter ID card, electricity/ telephone/ mobile bill/ bank statement (not more than 3 months old) bank statement, utility bill, registry copy, lease or rent agreement, TAN allotment letter
Age Proof PAN card, passport, driving license, voter id card, Birth certificate, Employee ID card (only for PSU/ Government employees), school/ college leaving certificate PAN card, passport, driving license, Voter ID card, Birth certificate, Employee ID card (only for PSU/ Government employees), school/ college leaving certificate
Income Proof Last 2 years Form 16, last 6 months’ salary slip, last 6 months’ bank account statement showing salary credit Last 2 years ITR, last 6 months’ bank account statement

Checklist for Applying for Personal Loan

Before you choose to opt for a personal loan for any financial need, you need to keep certain important things in mind which can help you take a better decision.

  • Loan amount and tenure: You need to assess your financial need very carefully and estimate the amount of money you need to borrow. Keep in mind that the money you borrow has to be paid back with interest. So, only borrow what you need and not extra. Similarly, you need to decide the tenure of the loan based on your repayment capacity.
  • Eligibility: Different banks have different criteria to choose an eligible candidate for giving out a loan. So, check the eligibility criteria of each bank and choose a suitable bank.
  • Processing time: Personal loans do not require very long processing time. However, if you require money urgently, you should choose an option with a minimum processing time.
  • Interest rate and other charges: When you take a loan, the amount of money that you will repay will depend upon interest rate, the tenure of the loan, and other charges related to the loan. Understand all these monetary charges to make an informed decision.
  • Documentation: Often the loan processing takes much longer time than required because people fail to submit the necessary documents on time. So, it is better to know in advance what you need to submit.
  • Foreclosure: It is important to understand the foreclosure policy of the bank very well so that you can get maximum benefit when foreclosing your loan.

Pros and Cons of a Personal Loan

Personal loans are one of the easiest solutions to any financial problem. However, they come with certain pros and cons.

Pros

Cons

No collateral and minimal documentation: As long as you have a good credit score, you can get a personal loan without any security. To avail a personal loan, you also do not require as much documentation as for most other types of loans Qualification criteria: While the guidelines for availing personal loan vary from bank to bank, qualification criteria are quite strict. It is must to have a good credit history to avail the personal loan. It is therefore very hard to get an unsecured loan with a poor credit history.
Speedy approval: Today, many banks offer e-application facility to customers which makes the applying and processing the loan fast. Some banks also offer pre-approved personal loans. High interest rate: Personal loans are mostly unsecured loans and therefore have a high interest rate. Interest rate of the personal loan is though less than interest rates on Credit Cards but still higher than secured loans.
Flexibility: There is no capping on the usage of borrowed personal loan amount, unlike other secured loans. Prepayment penalty: Several banks charge a prepayment penalty on prepayment of Personal Loans.

Compare Personal Loans offered by Various Banks

Different banks offer personal loan on different interest rates and charge different processing fees. The eligibility criteria and documents required for personal loan application also varies from bank to bank. You should compare the offerings of several banks before you apply for a personal loan.

People also ask

Q. How to calculate maximum EMI amount?

A. Banks calculate the qualifying loan amount based on the maximum amount of EMI you can manage to pay. It is generally capped at 30-40% of your monthly income. If you have a pre-existing ongoing loan, the EMI that you can pay will be less, and consequently, the qualifying loan amount will also reduce.

Q. Does my credit history affect my chances of getting loan approval?

A. Your credit history is one of the criteria which decides the approval or rejection of your loan application. A bad credit record drastically reduces your chances of getting a loan. However, if the loan amount is small, or your income has considerably increased recently, or you are opting for a secured loan, then you may still get the loan approval despite poor credit history.

Q. Is there a prepayment penalty on a personal loan?

A. Yes, banks and NBFCs do charge prepayment fees or penalty on the personal loan. The penalty is generally 1-3% on the outstanding principal amount of a personal loan.

Q. Can I get a personal loan for pensioner if I have a pension account with one of the leading private banks in India?

A. There are several private as well as public sector banks, which offer a personal loan to pensioners. However, there is a certain age cap with every bank, which you must not exceed at the time of repayment period. You can get a personal loan of up to 10-20 times of your monthly pension amount.

Q. Which one is better, a car loan or a personal loan if I want to buy a car for commercial purpose?

A. A car loan is certainly a better option in this case. However, it is not as easily accessible as a personal loan. The eligibility criteria for a car loan are difficult to meet in comparison to a car loan. So, if you are able to get a car loan then go for it. However, if you are not able to qualify for it then you can apply for a personal loan where you will have to pay higher interest rate.

Q. How to bargain for a better rate of interest on your personal loan?

A. There are multiple points on which you can negotiate and get a better rate of interest. If you have a very good credit score, you are a lucrative prospect for banks. Banks will be more than happy to give you a loan which will give you an upper hand in negotiating the terms and conditions of the loan. Also, the completion in the loan market is very high due a large number of banks offering loans. So, talk to several banks at a time and choose the one who gives you the best deal. If you are already a client of the bank and have a good repayment history with the bank, you can easily negotiate and get favourable terms on your next loan.

Q. What is the CIBIL score for a personal loan?

A. CIBIL scores generally vary from 300 to 900. If you have a score of at least 750, you can easily get a personal loan. The higher the score, the better are your chances to get secure a loan.

Q. Do I need to open a bank account to service my personal loan?

A. Yes, at least one functional bank account in your name is required to service your loan. It is even better if you have a bank account with the same bank from which you are borrowing money.

Q. Can I apply for a personal loan jointly with my spouse?

A. Yes, it is possible to apply for a personal loan jointly with your spouse. You can also make any of your parent a co-applicant in your loan. This method can help you in securing a bigger loan as it increases your capability to repay the loan as your income and your co-applicant’s income is clubbed when calculating your eligibility for the loan.

Q. If I fail to pay my loan, will it affect my co-applicant?

A. If you become a defaulter in case of a joint loan, your co-applicant will also be considered a defaulter. His credit history will also suffer equally.

Q. What are the main factors that affect interest rate of a personal loan?

A. In most cases, people get unsecured personal loans, so the interest rate is generally on the higher side. The interest rate also depends on factors like loan amount, net income, company category. If your net income is high and company profile is good, your interest rate will be low and vice-versa. Also, personal loan interest rates for government employee and defence personnel may be different from that for private salaried employees.

Q. Can I do a balance transfer on personal loan?

A. Yes, if the interest rate on your personal loan and EMI is higher when compared to the personal loans offered by other banks, then you can opt for personal loan balance transfer and reduce your monthly burden.

Q. Can I get top up on a personal loan?

A. Yes, you can get a top-up loan but the terms and conditions related to it may vary from bank to bank.

Q. How can I prevent rejection of my personal loan application?

A. Banks or NBFCs will give a loan to you if they believe that you can repay the loan. You need to do a few things to ensure that your loan application doesn’t get rejected:

  • If you have a spouse who is also working, you can add her as a co-applicant to boost the combined salary levels.
  • Clear your old debts first so that your leverage levels come down.
  • You can also balance transfer your existing loans so that the rate of interest on loans can come down and additional loan can be availed.
  • If your loan application is rejected due to a low CIBIL score, you can opt for loans where a CIBIL check is not required. Regular repayment track record on this loans can actually improve your CIBIL score. You can also try taking a loan from lenders which lend to borrowers with a low CIBIL score. However, the rate of interest offered by these lenders are generally higher than those offered by banks.

Q. Can I pay the EMIs of my personal loan when I am outside India?

A. Yes, you can make payments from outside of India through net-banking or online banking facility provided by banks.

Q. What are the benefits of part prepayment of a loan?

A. Banks allow part prepayment or foreclosure of a loan after you pay a few EMIs. If you are financially capable to prepay your loan, you should go for it to reduce the amount of interest you need to pay. You can also choose to reduce the total number of EMIs that you need to pay. However, as personal loans are fixed rate loans, banks typically charge a prepayment penalty of 2-5% over prepaid principal amount. It is important to understand the cost implications of prepayment, before taking a loan as well as before taking a decision to prepay.

Q. Can I get a personal loan with a bad credit score?

A. You can get a personal loan even if your credit score is poor. The best way is to opt for a secured personal loan. If all other factors are in your favour, you may still get an unsecured personal loan. However, the bank will charge high interest rate on your loan and may ask you to apply for loan along with a co-applicant to improve your credit worthiness.

Q. Do lending institutions change interest rates after sanctioning of a loan?

A. Banks generally do not change the interest rates of personal loans after sanction of loan because they are given at fixed rate. However, if you choose a personal loan at a floating interest rate, the bank will adjust the rate in response to the changes in the market interest rates.

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