Types of Personal Loans

As the term suggests, a personal loan is a loan which is taken for personal purposes. You do not need to specify the reasons to a bank or financial institute on how you are going to utilize the funds. You can use them at your own discretion for any legitimate purpose. Personal loans can be availed at both fixed and variable rates of interest. The loan can be repaid either in instalments or over an overdraft.

Personal loans can be classified under the two broad categories of secured and unsecured personal loans based upon whether the loan is borrowed against collateral or without any collateral. Most personal loans are unsecured loans.

Secured Personal Loan

In case of a secured personal loan, a bank keeps an asset as security against your personal loan. You can use your car, gold, a fixed deposit or even your insurance policy as collateral. The lender has the option to seize your asset in case you fail to repay your monthly instalments. This reduces the associated risk for lenders and they offer lower rates of interest as compared to those of unsecured personal loans. The processing fee is also lower than what you have to pay in case of an unsecured loan. Moreover, lenders are more willing to give away secured loans.

The following are the main types of secured personal loans:

Gold Loan

Gold loans can be defined as funds borrowed from financial institutions on pledging gold ornaments or gold coins. The bank first verifies the quality and quantity of loan before approving the loan application. The bank charges a small fee for processing your loan application.

A gold loan can be taken by any individual who is above the age of 18 years and has a stable income. The loan amount allowed sanctioned varies from bank-to-bank and usually stands between a minimum of Rs. 10,000 to as high as Rs. 20 Lacs depending upon the value of the underlying gold asset. The rate of interest charged for a gold loan is usually 1.25% higher than the MCLR.

Since the value of gold keeps changing, the bank charges appraiser fee from the borrower, according to the appreciated gold value, while releasing the asset.

Loan Against Fixed Deposits

You can keep time deposits like fixed deposits and certificates of deposit as security with banks for availing a personal loan. However, the loan must be taken from the same bank where you have kept your deposits.

The loan amount sanctioned for such loans will be equivalent to 80% – 90% of the value of your deposit and can range between a minimum of Rs. 25,000 to a maximum of Rs. 5 Crores. There is no processing fee charged while approving these loans.

Loan Against LIC Policy

The LIC insurance beneficiaries can use their policies as security for taking a personal loan. These loans can be availed only after the insurance premium for at least three years has been paid. The maximum loan that can be sanctioned against a LIC policy is equivalent to 90% of its surrender value (the amount that a beneficiary will receive on the maturity of policy).

The applicable rate of interest for this type of loan is between 9% – 11% per annum. This interest is to be paid twice a year, after an interval of six months. For availing this loan, the original LIC policy document is to be submitted along with the application form, identification proof, address proof, and income proof.

Loan Against Stocks

You can pledge your equity shares in order to avail a personal loan. The loan amount will depend upon the value of the underlying equity and can be as high as 50% of its value. You even have the option to swap shares based upon the stock market assessment. The loan application takes very less time to process and the funds are usually transferred to your account within 24 hours.

Pension Advance Loan

The individuals receiving pensions from central or state governments can avail a personal loan on signing all or a part of their pension income to the lender. These loans generally have a tenure of 5 to 10 years. However, the APR for these loans are very high and in some cases, these can be even higher than 100%, which makes these loans an expensive deal.

Unsecured Personal Loan

An unsecured loan is the one which has got no collateral backing. It means that you do not need to mortgage any asset for availing this type of loan. Most personal loans are unsecured loans. Since the lender-associated risk is high for these types of loans, they generally have comparatively high rates of interest. The processing fee is also very high for unsecured personal loans. However, the approval process is very easy and quick which makes these loans the best choice for meeting immediate requirements. Both the interest rate and the loan approval are dependent upon your repayment abilities which are judged based upon your net monthly income and your credit history. Currently, the minimum interest rate offered for an unsecured personal loan in India stands at 10.75% and it can go as high as 26%.

The following are the major types of unsecured personal loans available for you:

Co-Sign Personal Loan

As its name indicates, a co-sign personal loan is co-signed by another person. This person is like a guarantor for your loan who ensures the bank that you will repay the loan. His sign acts as an insurance for the loan that in case you are unable to repay your debt, he/she will pay-off the pending debt amount.

A co-signer should have a decent credit score and a good debt repayment history. This option helps those borrowers who have a very thin credit report indicating that they are new to the borrowing business.

Also, if you have a very low credit rating, a co-signer who has an exceptionally well borrowing behavior can fetch for you very low rates of interest.

Debt Consolidation Personal Loan

If you are juggling between multiple EMIs and bill payments, you can go for a debt consolidation loan. This loan combines your multiple debts such as credit card bills, other personal loans, utility bills, and medical expenses. This means that, now, instead of managing multiple EMIs, you just need to pay a single consolidated EMI every month. Debt consolidation can also help you save as the annual percentage rates may be lower than the mean of what you were paying towards your multiple loans.

Personal Line of Credit

A line of credit operates in a manner similar to a credit card. Here, instead of providing you with a lump-sum of money, a bank grants you access to a line of credit. You can borrow money from this line of credit as per your requirements. You are only charged interest over the amount that you borrow and not on the limit sanctioned by the bank. However, interest rates for a personal line of credit are higher than regular personal loans.

Payday Loan

A payday loan, usually referred to as the salary loan is a personal loan where you can borrow money from the bank on promising that you will return the amount on your next payday. Any salaried individual who has been working for at least one year and is drawing a salary of more than Rs. 20,000 every month is eligible to avail these loans.

The loan amount for a payday loan can range from a mere sum of Rs. 5,000 to amount as high as Rs. 1 Lac. The interest rates for payday loans are often high and the APR can even reach surpass a whopping 391%.

Takeaway

The financial ecosystem has a plethora of options for personal loans which can help you meet your requirements. While the secured personal loans offer lucrative interest rates and leniency in loan terms and conditions, the unsecured loans come with a stringent repayment procedure and higher interest rates. While you have to mortgage an asset for availing a secured loan, an unsecured loan is given solely on the basis of your repayment capabilities as well as your creditworthiness.

Personal Loan for Low CIBIL Score

A credit score is a numerical figure that symbolises the creditworthiness of a person and is generated on the basis of the credit data of an individual, that is available on the records. CIBIL score is a term that is synonymously used for credit score. It is issued by CIBIL which is an abbreviated form of Credit Information Bureau (India) Limited. The company has been renamed as TransUnion CIBIL. It is the oldest credit bureau in India and is, therefore, the most popular. Alongside TransUnion CIBIL, Experian and Equifax are the other credit bureaus in India which issue credit scores. Banks collect credit reports from all credit bureaus in order to define the creditworthiness of their customers.

Credit score plays a crucial role in the approval of your loan application for a personal loan. A high CIBIL score not only improves the chances of loan approval but also accelerates the process. Therefore, it becomes necessary for borrowers to maintain a good CIBIL score so as to enjoy the benefit of taking loans. However, under certain circumstances a lender even lends money to those with a low CIBIL score.

What is a CIBIL Score?

A CIBIL score is a three digit number generated by the credit bureau TransUnion CIBIL. The credit bureau records the credit history of an individual and generates a credit report. Based upon this report, it assigns a number to an individual. This number is referred to as the CIBIL score of the individual. It ranges between 300-900 and indicates a person’s creditworthiness where 900 is the best credit score and a score of 300 is the worst.

A CIBIL score of 750 is considered to be good and individuals with a credit score equal or higher than this number are given preference for lending. However, banks may also lend to individuals with a CIBIL score as low as 600. A credit score below 600 is considered as bad and lenders often refrain themselves from giving away funds to these individuals.

CIBIL Score and Personal Loans

Since personal loans are unsecured type of loans, CIBIL score acts as an important determinant of whether a lender will lend to a particular borrower or not. A high CIBIL score indicates a good credit behaviour in the past. This indicates that a borrower will continue the good behaviour in the future and will repay the loan on time. A bank will easily lend to such borrowers. Also, they will enjoy lower interest rates and better loan terms.

A low credit score reflects poor borrowing history. A lender will often resist from lending to customers with low CIBIL scores. Even if the loan gets approved, the interest rate offered to these customers will be extremely high. The general unwillingness of lenders and strict terms of lending limits credit options for customers with low credit scores. The banks however offer a relief option for these customers referred to as bad credit loans.

Bad Credit Loans

A bad credit loan is a personal loan only with just one difference that it is for people with a bad credit report. The interest rates associated with bad credit loans are phenomenally high and the loan terms are usually stringent. The application process and repayment methods for bad credit loans are same as that of a personal loan. The approval process is generally short, with loans getting approved within a couple of hours, since most of the lenders offer online application and approval. However, since banks offer a high interest rate over bad credit loans you can look for other options for availing these loans such as:

Credit Unions

Credit unions are a great option for those looking to save amount payable as interest on a personal loan. The maximum interest that a credit union can charge is capped at a rate of 18%.

Adding a Co-Signer

A co-signer is a guarantor with normally a decent credit score who signs your loan application as a guarantee that in case you fail to repay your loan, he will pay the pending amount. If your co-signer has an incredibly good credit history, a lender may offer lower interest rates.

Home Equity Loans

A home equity loan is taken by keeping equity of home as collateral with the lender. Here, credit score is not a determining factor for the approval of loan. The loan amount depends upon the value of the property. Since it is a secured loan, the interest rates are naturally lower compared to a personal loan.

Peer to Peer Lending

There are numerous online blockchain, machine learning and artificial intelligence based platforms that provide a lender-borrower interface. The lenders over these platforms offer comparatively lower interest rates and are generally flexible with loan terms.

Family or Friends

Who is easier to convince about your creditworthiness than your own family and friends. Not only will they easily lend you the money but will also charge lower interest rates and in some cases may not charge interest at all.

Advantages of a Bad Credit Loan

Along with the ability to avail credit with a low CIBIL Score a bad credit personal loan offers many other benefits as well. These are:

Fast Approval

Since most lenders have an online presence, applications can be filed online. The AI algorithms only take a few minutes to process the application and verify the attached documents. Thus, it only takes a couple of hours to get a response from the lender. Certain lenders will even transfer the funds in your account on the same day only, such as Indiabulls or Home Credit.

Lower Interest Rate Compare to Credit Card

The interest rates attached with bad credit personal loans are comparatively lower than that of a credit card debt. It makes them a better and more affordable option.

Competitive Market

Due to increase in the number of peer-to-peer lending platforms, there is a rising competition between various lenders. This competition leads to lowering down of interest rates. You can compare interest offers from various lenders and then decide what suits the best to your pocket.

Loan Tenure Elongation

Bad credit loans often come with the flexibility of increasing loan tenure by a duration that may range between twelve months to five years.

Improves Credit Score

Making sure that EMIs are paid on time can improve your credit score and therefore help you fetch better loan terms next time.

Disadvantages of a Bad Credit Loan

As everything comes with a price, availing a personal loan with a bad credit reputation also has certain adversities attached to it. These include:

High Rates of Interest

Since bad credit loans involve a huge risk at the lender’s side, they will naturally offer high interest rates in order to compensate for the risk.

Fees and Penalties

There is a high processing fee, loan origination fee and late payment fee attached to a bad credit loan. Also, if you make repayments by cheque, you will have to pay an additional amount as cheque processing fee.

Collateral Requirement in Some Cases

Due to the high risk involved for themselves, the lenders may ask you to keep an asset such as a house, car or any other valuable as mortgage in order to cover the risk.

Eligibility Criteria

A bad credit loan can be availed by salaried, self-employed and even a non-salaried person. The following conditions are to be met in order to avail a bad credit personal loan.

Resident of India

For availing a bad credit loan in India, it is important that the applicant must be a resident of India. Therefore, NRIs cannot enjoy such loans.

Minimum Age

An applicant must be at least 18 years old for availing a personal loan with a bad credit score.

Minimum Income

The annual income of a person should not be Rs. 3 Lacs so as to enjoy the benefits of a bad credit loan. This ensures a lender that a person is capable of repaying the loan.

Takeaway

A bad credit loan can fulfil the financial needs of adult residents with a low CIBIL score. An online application process and quick approval make it even more attractive. However, the high interest rates and the stringent norms attached to it can make it a dangerous option. One must evaluate his capacities before entering the treacherous waters of a bad credit loan.

Personal Loan Pre-closure Charges

Although a personal loan looks appealing for most individuals yet, in the long run, it can prove to be painful pertaining to the long repayment period and high interest rates. No doubt that personal loan is your way-out of a financial crisis but what after the money crunch is over and you have access to ample funds. Now you can either keep these funds in your bank accounts, use them to make investments or can pay-off your personal loan. While keeping these funds in your bank account may not serve any purpose, paying off your debt can relieve the monthly tension from your income and keep the loan from hurting your FOIR.

You can pay-off your debt anytime by informing your bank, once the loan lock-in period is over. This advance payment is referred to as loan prepayment or loan pre-closure charges and can help you save on interest payable towards the personal loan. If you have the entire amount of loan, you can also choose to opt for a personal loan pre-closure facility.

What is Personal Loan Pre-closure?

The pre-closure of any loan means that the loan is paid off before the entire tenure of the loan is over. That is, the loan amount is paid in advance of the respective repayment schedule. The loan can be pre-paid either fully or partially. In case the loan is paid-off fully, the phenomenon is known as pre-closure of the loan as now the loan has been closed permanently and no future payments are to be made towards it.

In case of partial pre-payment of a personal loan, a borrower pays some percentage of his outstanding loan amount beforehand. This helps a borrower save on the interest payment as now he has to pay interest only on the pending loan amount. There are certain banks and financial institutes who do not allow the partial pre-payment of a personal loan. These are:

  • Kotak Bank
  • IndusInd Bank
  • Aditya Birla Finance
  • Indiabulls Dhani
  • Federal Bank
  • RBL Bank
  • Corporation Bank
  • Capital First (IDFC First)

It is to be noted here that neither partial prepayment nor full pre-closure is allowed before the lock-in period for a personal loan is over. This period is specifically mentioned in your respective loan statement and neither partial prepayment nor full pre-closure is permitted before the completion of this lock-in period. This lock-in period varies from bank-to-bank and usually ranges between 6 to 12 months.

What is Personal Loan Pre-closure Charge?

Since the lenders are losing some proportion of their profit by pre-closing the loan, they levy some charge as a penalty on the borrower. This charge is termed as pre-closure charge and usually ranges between 2% to 4% of the outstanding principal payment for a personal loan. However, certain lenders can even levy a pre-closure charge amounting to a whopping 7% of the pending principal loan amount.

In the table given below, we have provided details of pre-closure charges levied by major financial institutes.

Bank/FIPrepayment ChargesPart-Payment Charges
HDFC Bank2% to 4% of the Principal Outstanding Amount2% to 4% of the Part-Payment Amount
YES Bank2% to 4% of the Principal Outstanding Amount1% of the Part-Payment Amount
SBI0% to 3% of the Prepaid Amount0% to 3% of the Prepaid Amount
Axis BankNILNIL
ICICI Bank5% of the Principal Outstanding Amount5% of the Principal Outstanding Amount
Citibank0% to 3% of the Principal Outstanding Amount3% of the Part-payment Amount
Kotak Bank5% of the Principal Outstanding AmountPart-payment Not Allowed
Canara BankNILNIL
Standard Chartered Bank1% to 5% of the Principal Outstanding Amount2% to 3% of the Part-payment Amount
Bajaj Finserv0% to 4% of the Principal Outstanding Amount0% to 2% of the Part-payment Amount
IDFC First5% of the Principal Outstanding AmountPart-payment Not Allowed
Indusind Bank4% of the Principal Outstanding AmountPart-payment Not Allowed
Indiabulls Dhani5% of the Principal Outstanding AmountPart-payment Not Allowed
Home CreditNILNIL
Aditya Birla FinanceNILPart-payment Not Allowed
IDBI Bank0% to 2% of the Principal Outstanding Amount0% to 2% of the Part-payment Amount
HSBC BankUp to 3% of the Principal Outstanding AmountUp to 3% of the Part-payment Amount
PNBNILNIL
Indian BankNILNIL
Andhra BankNILPart-payment Not Allowed
Syndicate BankNILNIL
Bank of Baroda0% to 4% of the Principal Outstanding Amount0% to 4% of the Part-payment Amount
Federal Bank2% of the Principal Outstanding AmountPart-payment Not Allowed
RBL Bank0% to 3% of the Principal Outstanding AmountPart-payment Not Allowed
Bandhan BankNILNIL
Fullerton India Finance0% to 7% of the Principal Outstanding Amount0% to 7% of the Part-payment Amount
Tata Capital2% to 4% of the Principal Outstanding Amount0% to 2% of the Part-payment Amount
Bank of IndiaNILNIL
Corporation BankNILPart-payment Not Allowed

The table clearly indicates that there are many lenders who do not impose any kind of prepayment charges at all. Also, a borrower must keep looking for pre-closure offers as banks provide certain seasonal offers, every now and then, when banks completely waive off the pre-closure charges for a certain period of time.

Benefits of Pre-closing a Personal Loan

The preclosure of a personal loan comes with many benefits attached to it. These are:

Leads to Savings

Prepayment of the pending principal loan amount helps you save on the interest payment. The tenure of a personal loan generally ranges between 3 to 5 years. The interest rates charged on personal loans are higher as compared to other loans. Pre-paying a personal loan helps to cut interest payments since the interest will be charged only till the time when the complete repayment is made.

Relieves Debt Burden

Paying monthly EMIs on time is a big tension and often eats up a major portion of your monthly salary. Pre-closing a personal loan releases the debt stress from your income and brings you peace of mind.

Disadvantages of Pre-closure of a Personal Loan

The preclosure of a personal loan can also bring your way certain adversaries. These are:

Pre-closure Charges

In order to cover the loss of interest payments, the banks impose a pre-closure penalty that can be as high as 7% of the outstanding principal amount. This amounts to a huge loss of funds. Therefore, the interest savings on pre-closure is often regarded as a myth by many financial experts.

Loss of Investment Opportunity

There is an estimated loss of investment opportunity as if not used for pre-closure, you could have used the underlying funds for making some kind of investment that could have generated profits for you. But since, now, the funds are being paid towards loan pre-closure, you lose the opportunity.

Process for Pre-closure of a Personal Loan

Pre-closure of a personal loan is as simple as applying for one. It is to be, however, kept in mind that the loan cannot be closed online and you would need to physically visit the bank branch in order to close your loan. The following are the major steps that you need to follow in order to successfully pre-close your personal loan:

Step 1: Check if you are eligible for the pre-closure process.

Go through your loan statement and check the terms and conditions attached to the pre-closure of a personal loan. Check the lock-in period and the minimum number of EMI payments which should have been made in order to close the loan. Make sure that you have completed the lock-in period and have made the minimum number of EMI payments.

Step 2: Contact the bank and inquire about the process and documents for personal loan pre-closure.

You can either call the bank or visit the bank branch and inquire about various details of personal loan pre-closure. Ask them about the documents that you would require to carry in order to successfully close your loan and note them down. Also, inquire about the total amount that you will need to pay for pre-closure which includes the principal amount and the pre-closure charges.

Step 3: Prepare all the required documents.

Prepare all the documents as stated by the bank and as is listed in your loan statement. These include:

  • Personal Loan account number: This number is clearly mentioned on your personal loan statement. Note it down.
  • Identity Proof: You will need to carry a government authorised identification proof such as a passport, Aadhar card, driving license or PAN card.
  • Cheque or Demand Draft: Carry a cheque or demand draft for the total payable amount, signed towards your personal loan account.
  • Other Documents: Also carry all other loan-related documents which include the loan statement, approval letter any other document issued at the time of sanctioning of the loan.

Step 4: Visit the bank and move to the loan section.

Visit the respective bank branch along with all the required documents. Once you reach the bank, go to the loan section of the bank. Contact a bank executive there and request for the pre-closure form. Also, inquire about any additional formalities that you are not aware of.

Step-5: Fill the pre-closure form

Fill in all the details on your personal loan pre-closure form. Make sure you correctly fill the form and cross-check all the details. Sign the form after ensuring that it has been filled correctly.

Step 6: Submit the form along with other documents.

Submit the pre-closure form along with all other documents mentioned under step 3.

Step 7: Make payment

After you have submitted all the required documents, pay the entire loan amount along with pre-closure charges. You can either pay in cash, through cheque or a demand draft.

Step 8: Collect acknowledgment slip

The bank will issue an acknowledgment slip in favour of your loan pre-closure. The final authorisation letter will be sent to you through mail once personal loan account is permanently closed by the bank, which generally takes a few days.

Takeaway

If you have the availability of funds and your personal loan tenure is far from completion, opting for personal loan pre-closure is a good idea as it can help you save on the amount of interest payable. However, before choosing to avail the facility, you must go through the underlying terms and conditions for the pre-closure process. Also, the bank will impose a pre-closure charge for letting you pay-off your loan before the repayment schedule. If the pre-closure penalty amount is less than the interest payable, only then opt for the facility.

Personal Loan vs Overdraft

Personal loan as well as overdraft account both involve shorter approval process, require minimal documentation and above all both have no compulsions as far as utilisation of funds is concerned. Yet there are considerable differences between the two, in terms of loan structure, borrowing costs and repayment mechanism. There are certain factors that you must keep in mind before deciding whether you should go for a personal loan or for an overdraft facility.

In case of a personal loan, you have to formally apply in a bank or a NBFC and wait for its approval every time you need new funds whereas for an overdraft facility, you have to apply just once and after its approval, you can access funds as many times as you would like without going through any further application process for a long period. Overdraft facility allows you to withdraw money from your current account even after the entire balance in the given account has been exhausted. Based upon your customer profile, a bank puts a cap on the maximum amount that you can borrow from your current account. Both personal loan and overdraft have certain similarities and differences.

Similarities

An overdraft and a personal loan have certain things in common as discussed below:

No Requirement for Collateral

There is no requirement of keeping an asset as collateral for availing a personal loan or an overdraft facility.

Discretion on the Use of Funds

Whether you are borrowing a personal loan or get sanctioned an overdraft facility, you do not need to specify the reason for which you are borrowing the amount. You can use it on your own discretion for any legitimate cause.

Ability to Borrow Small Amounts

Unlike other loans, personal loans and overdraft borrowing facility provides you with an option to borrow amounts as low as Rs. 5,000 from financial institutions.

Easy Accessibility

For an overdraft facility, you do not need to undergo an approval process every time. You can access any amount within the limit prescribed by the bank, instantly. On the other hand, the application process for a personal loan is also very simple and requires minimum documentation and verification. This makes these borrowing options quick and easily accessible.

Differences

There are considerable differences between a personal loan and an overdraft. These are:

Structure of Loan

While a personal loan is an unsecured loan, an overdraft facility can be availed over your current account. A personal loan amount is made available in one go whereas in case of an overdraft, the money can be withdrawn as and when needed provided the overall amount does not exceed the limit prescribed by the bank. Also, the interest is to be paid only on the borrowed amount in case of an overdraft.

Application

While in case of a personal loan, a formal application is to be filed at a financial institution with required documents every single time you need to borrow. After this, a bank verifies the documents, enquires your credit report, calculate your creditworthiness and then decides upon the various lending aspects. However, in case you are already availing an overdraft facility, no such formalities are required, you can withdraw anytime, anywhere at your own will without taking prior permission from the bank.

Lending Amount

The lending amount for a personal loan is set when a mutual consent is reached between both the parties. Therefore, it takes into consideration both- your needs as well as the bank’s will. On the other hand, the limit for borrowing through an overdraft account is solely set by the bank on its own discretion. If you require cash that exceeds the maximum limit prescribed, you will have to look for some other option.

Tenure

Personal loans are fixed term loans with an average duration ranging between 12 to 60 months. However, the duration for the complete repayment of an overdraft is not fixed and they are often repaid in a much shorter duration than a personal loan.

Interest Rate

While a monthly interest is charged on a personal loan, an overdraft charges a daily interest. The interest rates over overdrafts are usually higher than that of a personal loan. Also, the interest is to be paid on the total amount of loan sanctioned in case of a personal loan whereas for an overdraft, interest is to be paid only on the withdrawn amount and not on the overall limit prescribed.

Repayment

A personal loan comes with fixed EMIs for repayment whereas an overdraft can be paid back any time either fully or partially as suitable to you. However, if the bank demands for repayment, you will have to fulfill those demands immediately. In case of prepayment of a personal loan, a bank levies prepayment charges that may range from 1% to as high as 5%. No such charges are associated with an overdraft.

Credit Score

While processing a personal loan application, a bank requests a hard inquiry on your credit report. This may slightly affect your credit report, lowering your credit score. However, no such inquiry is involved in case of borrowing from an overdraft account. Thus, it does not have any affect on your credit score.

Multiplicity

In case of personal loans, you will have to apply for a new loan every time you need money. However, you can borrow as many times as you want over a single overdraft account. You do not need to request for a new account every time.

Which one to Avail?

If you need money for an emergency or for meeting your day-to-day requirements of funds, an overdraft account will be a good option for you as it does not require any kind of application and documentation for accessing the funds. Further, the bank will not take any time to release the funds over an overdraft facility. You can therefore enjoy instant funds with the option of repaying the amount anytime. It is the most suitable option for curbing your temporary unavailability of funds.

However, if you require funds for a long-term investment or expenses, a personal loan is a better option. It will lower down the interest cost in comparison to an overdraft that charges interest on a daily basis. A personal loan also provides the stability of repayment through fixed EMIs and fixed monthly interest rates.

Takeaway

Both personal loan and overdraft facility have their own pros and cons. While the former involves a fixed amount of disbursement and a fixed schedule of repayment, so is the best suitable to the persons who have monthly fixed income while in the latter case, the credit amount as well as the repayment schedule being free from any bondage, best suits the requirement of a self employed person. Therefore, a personal loan proves to be the best option for the salaried persons whereas, overdraft facility being providing flexible repayment best suits for businessmen whose income keeps fluctuating from time-to-time. Therefore, we must keep in mind our need, expenditure and repayment capabilities before choosing any of the two options.

Should You Take a Personal Loan for Starting a Business?

Starting a business is not a cake-walk on a straight road but a path full of twists and turns. As it is said the biggest challenge is to begin, the biggest hurdle lies in raising the requisite capital for your startup. Bootstrapping is not always an option and while investors are a good source for both funds and mentoring, it takes a lot of time, effort and convincing on your part to make them take an interest in your business. Your business proposal should be well-tailored, you must have conducted in-depth market research and your business revenue model must be promising as well as visionary. The same goes for business loans. Then how to arrange the funding? Well, you can simply go for a personal loan. The loan approval is solely based upon your personal creditworthiness and the disbursal of funds is done within a few snaps of fingers.

Start-up and Personal Loan

Since you do not need to specify the reason about how you are going to utilize the funds generated by the means of a personal loan, you can use it for any purpose, even for funding your business. The loan process is simple involving minimal documentation (you just need an identification proof, address proof, and income proof) and verification. There is no requirement to pledge any of your assets and the funds are transferred to your account in no time. However, the interest rate for a personal loan is comparatively higher than what will be offered to you in case of a small business loan.

The stats are not your best friend when it comes to establishing your startup. According to a recent report published by the IBM Institute for Business Value and Oxford Economics, with the title “Entrepreneurial India,” 90% of the startups fail within the first five years in India. Going for a personal loan for starting a business under such scenarios doubles the risk. On one side you will bear the burden of the loss of investment funds and on the other side will be a tarnished personal credit flow. This justifies Mark Cuban’s words, “Only morons start a business on a loan.”

Should You Take a Personal Loan for Business?

What Cuban implies to say is that while going for a loan if you have steady income inflows is a good idea, availing one at a time when you are risking your entire income for establishing an enterprise of your own can prove to be deadly. Therefore, you must secure both- your income sources as well as your personal credit lines before adventuring into the treacherous waters of availing a personal loan for a business.

Benefits of Taking a Personal Loan for Starting a Business

Availing a personal loan for starting your business could be a good idea as a personal loan comes with many benefits attached to it. These include:

Easy Qualification

The eligibility norms for a personal loan are simpler than those of any other business loans. The eligibility for a personal loan depends on factors such as age,  occupation, income, employment & income stability, residential status & stability, credit score and number of dependents. You do not need to present your business proposal and revenue model for availing a personal loan for starting your business. Its approval is mainly dependent upon your net monthly income and credit report.

Instant Disbursal of Funds

Since a personal loan does not involve much documentation and verification, the approval process takes an average of 24 to 48 hours and funds are transferred instantly into your personal loan account. This makes this loan the fastest method to arrange funds for meeting immediate cash requirements of your business.

No Requirement of Collateral

As most personal loans are unsecured loans, you do not necessarily keep a valuable asset as security with the bank. Therefore, you can enjoy business funding without the fear of losing your asset.

Disadvantages of  Taking a Personal Loan for Starting a Business

Using your personal loan for business purposes can bring in many adversaries and can land you in difficult waters. Some of the disadvantages are listed below:

Risking Your Personal Credit

As already mentioned in the article, starting a business is a risky affair and taking a personal loan for starting your business can damage your personal finances. Since a personal loan is taken by an individual, you need to repay the loan even if your business fails to operate. Therefore, there is a lot at stake while going with the option of taking a personal loan for starting a business.

Limited Funds

While your business requirements may increase from time-to-time, a personal loan provides limited access to funds. While some banks like HDFC Bank can offer a personal loan of up to Rs. 50 lakh, most banks do not lend over Rs. 20 lakh in case of a personal loan. Therefore, a personal loan may not meet all your entrepreneurial requirements.

High Rates of Interest

Personal loans being unsecured are risky for lenders and they, therefore, charge very high rates of interest for personal loans. Depending upon the creditworthiness of a borrower, some banks can even charge interest at rates as high as 26%.

Things to Take into Consideration Taking a Personal Loan for Starting a Business

There are certain factors that you must keep in mind while opting for a personal loan for startups. These are:

Debt-to-income Ratio

Debt-to-income ratio is one of the primary factors that lenders take into consideration while processing your loan request. This ratio indicates your ability to manage loan repayment. Normally, a debt-to-income ratio of greater than 43% is considered good by the lenders. You must ensure that you have a good debt-to-income ratio otherwise even if your loan application gets approved, the EMI payment will exhaust all your monthly income and all you will be left with is peanuts, and it will become impossible to manage your monthly expenses.

Credit Score

Credit score is another crucial factor that helps a bank decide upon the various aspects of your loan request. The bank often offers a high interest rate to individuals having low credit scores. Therefore, you must check your credit score before proceeding with your loan application as there are chances of rejection if you are at the lower side of credit score.

Should You Start a Business with a Personal Loan?

While starting a business with a personal loan is not an entirely bad idea in itself but overlooking the various how’s and what’s is like skating on the thin ice. You can go for a personal loan for starting your business if you have a stable income source, a good credit score and a high debt to income ratio. If you do not have a decent credit score or a debt-to-income ratio of at least 45% and still opt for a personal loan, you are opening a pandora box as your business will not start generating huge returns immediately after coming into operation. It will take a lot of time to start earning profits. You must ensure that you can manage your debt repayment till the time your business is still making its mark otherwise a personal loan availed at a high interest rate will exhaust all your income.

Personal Loan Processing Charges

Processing fees are levied by the banks and financial institutions towards the expenses they have to make in order to process the funds and managing it throughout the loan tenure.

It includes, but not limited to, the cost of manpower and resources required to verify the borrower authentication, checking credit behaviour of the borrower along with some internal documentation a lender has to maintain in order to offer a personal loan.

The processing charges on a regular personal loan ranges from 1% to upto 3% of the loan amount. However, private financers tend to levy high processing charges which can range upto as high as 6.5% of the loan amount. Although, in the case of pensioners loan and senior citizens personal loans, the lender may waive the applicable charges.

Processing Charges levied by Banks/Financial Institution

Banks/FIsApplicable Processing Charges
SBI1% of the loan amount
HDFC BankUpto 2.5% of the loan amount
Rs. 1,999 to Rs. 25,000 for Salaried 
Rs. 2,359 to Rs. 88,500 for Self-Employed Professionals 
Rs. 1,999 for Balance Transfer to Salaried borrower. Minimum 0.99% of the loan amount for Personal Loan to Self-Employed Professionals.
Axis Bank1.5% to 2% of the loan amount
YES BankUp to 2.50% of loan amount
Min. Rs. 999
ICICI BankUp to 2.25% of the loan amount
Indusind BankUp to 2.50% of loan amount
Min. Rs. 1000 for Personal Loan and Min Rs. 250 for Personal Loan on Credit Card
HSBC BankUp to 2.5% of the loan amount
Max Rs. 2499
Kotak Mahindra BankUpto 2.5% of the loan amount
CitibankRs. 30,000
Standard Chartered BankZero to upto 2% of the loan amount
50% Concession on Processing Fee for Online Applications
Bajaj Finserv2.25% to 3% of the Loan Amount
For Salaried Personal Loan 
Upto 2% of the Loan Amount
For Doctors and Self-Employed Personal Loan 
2% of the Loan Amount
For Personal Loan to CAs and Engineers
Fullerton India1.5% to 6.5% of the Loan Amount
Capital FirstUp to 1.50% of the loan amount
Canara Bank1% of the loan amount or Min Rs. 50
For Personal Loan to Salaried & Teachers 
Nil
For Personal Loan to Pensioners
Tata CapitalUp to 2% of the loan amount
Min. Rs. 999
Aditya Birla Finance2% of the loan amount
IDBI BankUpto 2.50% of the loan amount
For regular Personal Loan 
Rs. 250
For Personal Loan on Credit Cards
PNB1.80% of the loan amount
For Salaried and Self-Employed Personal Loan 
Nil
For Personal Loan to Pensioners
Bank of Baroda2% of the loan amount
Min Rs. 1,000 to Max Rs. 10,000.
RBL BankUpto 2.50% of the loan amount
Bank of India2% of the loan amount
Min Rs. 1000 to Max Rs. 10,000 for regular Personal Loan 
Min Rs. 500 to Max Rs. 2000 for Personal Loan to Pensioners 
1% of the loan amount
For Personal Loan to Doctors
Bandhan Bank1% of the loan amount
Federal Bank0.50% of the loan amount
Min Rs. 500
Home CreditNil
Indiabulls Dhani1% to 5% of the loan amount
Indian Bank0.51% of the loan amount or Max Rs. 510
For Salaried Personal Loan 
Nil
For Pensioner loans upto Rs. 25,000. 
Rs. 255
For Pensioner loans above Rs. 25,000
Andhra BankUpto 2.75% of the loan amount
Syndicate Bank0.50% of the Loan amount or Min Rs. 500
For Salaried Personal Loan 
Zero to Rs. 200
For Personal Loan to Senior citizens
Corporation Bank1.50% of the loan amount.
Min Rs. 500
Dena Bank1% of the loan amount.


Personal Loan Top-Up

Top-up loan is an advance amount which you avail on top of your existing personal loan based on existing or increased interest rate and repay it within the monthly instalments of the existing loan, over a course of extended repayment period.

A borrower can avail personal loan top-up only after a period of 12 months from the date of disbursal of existing personal loan and if he/she is maintaining a satisfactory repayment track. However, some lenders allow borrowers to avail additional funds only after 6 months from the disbursal.

Personal Loan Top-Up at a glance
PurposeMedical Emergencies, 
Vacation, 
Wedding, 
Higher Studies, 
Home Renovation, 
Debt Consolidation, 
Purchase of Costly Consumer Products etc.
Maximum AmountUpto 100% of Existing Loan
Interest Rate10.99% – 24%
Tenure12 to 24 months usually
Lock-in Period12 Months usually

Personal Loan Top-Up Offers

Banks/FIsInterest RatesMax Loan AmountWhen to Apply?
SBI12.15%Rs. 15 LacsAfter 12 months
HDFC Bank11.39% – 20.99%Rs. 50 LacsAfter 12 months
Axis Bank15.50% – 24%Rs. 15 LacsAfter 12 months
ICICI Bank11.25%Rs. 20 LacsAfter 12 months
YES Bank10.75% – 15.90%Rs. 25 CroresAfter 6 months
Citibank12% – 22%Rs. 30 LacsAfter 12 months
Tata Capital11.49% – 19%Rs. 25 LacsAfter 12 months
Kotak10.99% – 24%Rs. 15 LacsAfter 9 months

Advantage of Personal Loan Top-Up

Easy Access to Additional Funds

Availing a top-up loan gives you the easy access to additional funds in need. And, the borrower can utilise the funds for any purpose just like regular personal loan.

Minimal Documentation

Since it is a top-up on existing loan account, the borrower doesn’t need to go through the entire documentation process again. All he/she need to provide is receipts of existing loan EMI repayments and KYC information.

No Guarantor/Security

Since top-up loan is an add-on to the existing loan account, the banks and financial institutions doesn’t ask for any third party guarantee or collateral security.

Increased Tenure

In case of top-up loans, banks and financial institutions tends to increase the tenure of existing loan. Hence, borrower can easily repay his loan without struggling with increased EMI amount or different EMIs.

Disadvantages of Personal Loan Top-Up

Increase in Total Loan Cost

Due to the additional funding, the borrower end up paying more towards the interest amount applicable on personal loan, which eventually increase the total cost of the loan.

Eligibility Criteria

  • Applicant must be an existing borrower in the same bank.
  • Applicant must have clean repayment track with no defaults.
  • Applicant must have repaid 12 EMIs (6 EMIs in YES Bank and 9 EMIs in Kotak) before applying for top-up.

Documentation

  • Receipts of existing loan EMIs.
  • KYC information

What is a Personal Loan?

personal loan is an unsecured loan taken for personal purposes. It has an easy application process, requires minimum documentation and can be approved in no time. You can use it at your own discretion for any legitimate purpose that you can think of.

Being an all-purpose loan, a personal loan is a dependable source that provides for instant funds to meet your additional expenses emerging suddenly. Be it a trip abroad or a medical emergency popping up out of nowhere, a personal loan is there to share your load.

If you have a good credit history and regular income inflows, you can apply for a personal loan and get approved without much formalities and delays. An easy application process that requires minimum documentation coupled with simple repayment method makes it a favourite for borrowers. Also, there is no requirement of collateral that makes it accessible for a large section of people.

However, you must safeguard various income prospects before opting for a personal loan as there are also certain disadvantages attached to it. For instance, a high fee is charged for processing your loan application. The rate of interest is higher and increases your debt burden and EMIs. The failure of repayment can severely affect your credit score, dampening your future borrowing chances; In case of a default you could be subjected to imposition of sky high penal interest.

Characteristics of a Personal Loan

Unsecured Loan

An unsecured loan is the one that does not require a collateral for borrowing. Most personal loans are unsecured in nature.

Multipurpose Loan

A personal loan provides for the flexibility of usage meaning that you do not need to define the reason for which you are taking the loan. You can use it on your own discretion whether you want to go for a family vacation, purchase a gadget, renovate your house, have a dream wedding, pay your child’s tuition fees, go for a world tour or any other purpose.

Easy Application Process

The application process for a personal loan is quick and easy. You are only required to share basic details such as your occupation, income and existing debts.

Minimum Documentation

There is no involvement of bulky documentation. You just need to submit an identification proof, address proof and an income proof along with your application form.

Quick Approval Process

The minimal documentation and information shortens the verification process and hastens the approval process.

High Interest Rate

As no collateral is required for availing a personal loan so in order to cover the associated risk the bank charges a high rate of interest.

Who can apply for a personal loan?

The eligibility for a personal loan depends on multiple factors which include your age, occupation, income, employment & income stability, residential status & stability, credit score and number of dependents.

Both salaried and self-employed individuals can apply for a personal loan. Even NRIs can avail a personal loan in India. The age of a salaried individual should be less than 60 years and for self-employed individuals it should be less than 65 years for taking a personal loan.

If you are working in a company that is listed with the Registrar of Companies or the bank recognises the company as a customer, your minimum income should be between Rs. 12,000 to Rs. 18,000 if you are residing in Tier II cities while it should be between Rs. 18,000 to Rs. 25,000 for those residing in Tier I cities. If you work in a smaller company then these amounts will be higher by 25% to 40%. Some Banks are shy of lending to BPO’s except the listed ones.

Credit score is a major factor guiding your chances to avail a personal loan. A higher credit score enhances your chances of availing a loan. Generally, a credit score of higher than 750 is required for unsecured loans. For secured loans, a credit score of 650 is also considered as good.