Personal Loan is an unsecured loan, provided for any purpose. The applicant is offered funds based on his/her credit history and risk profiling. Personal Loans are instantly approved and are usually more expensive than other form of loans.
The size of the loan amount one can get mainly depends upon some of the crucial eligibility factors, such as the monthly/annual income of the borrower, current age, credit risk profile of the borrower, residential stability, total work experience and growth in the profession, nature of the job, stability at the current organisation, tenure and the spending behaviour of the borrower. The banks/FIs analyse these factors to determine how much amount they can lend to a specific borrower without being at any credit risk.
Depending upon the credit risk profiling and their loan eligibility, a borrower may get the approval to avail the funds as low as Rs. 10,000 to as high as Rs. 50 Lacs from banks/FIs. However, there are very few of the lenders who offers loan amount as low as Rs. 1,000 to Rs. 5,000 such as Indiabulls and Home Credit. These lenders usually targets the kind of borrowers who doesn't have any credit history; hence, are unable to avail the funds from the banks/FIs.
The minimum and maximum loan amount a borrower can avail, varies according from bank to bank and also depending upon the loan schemes a bank/FI has to offer. HDFC Bank offers Personal Loan of upto 50 Lacs and so axis bank upto 25 Lacs.
Tenure is an important part in determining how much loan amount a borrower can get and also defines the size of your monthly repayments. Moreover, it plays an important role in deciding the overall cost of a personal loan since banks/FIs tends to offer high interest rate for short term loans. Most of these banks and FIs offers personal loans within the tenure range of 12 months to maximum 60 months but may differ from bank-to-bank as per the loan scheme.
However, there are very few of the lenders available who offers tenure as short as 6 months or as high as 96 months such as HSBC Bank offer repayment period as low as 6 months to any kind of borrowers while Bajaj Finserv offers repayment period as high as 96 months on doctors loan. It is to notice that most of the banks/FIs tends to offer short repayment period for personal loans availed for purchasing consumer products whereas tenure between 12 to 60 months for Salaried Professionals and some banks offer longer tenure if the borrower is a self-employed.
Interest rates is one of the main components of personal loan EMIs and defines how costly the personal loan would be on borrower's pocket. Interest rate is of two types in nature, Fixed Rate of Interest and Floating Rate of Interest and is calculated based on the few factors like loan amount and tenure.
In case of Fixed Interest rate, the banks/FIs charges a fixed percentage on the principal outstanding amount which doesn't change throughout the loan tenure; Hence, the EMIs remains the same over the entire period of the loan. Whereas, in case of Floating Interest rate, the banks/FIs charges a variable rate of interest which varies according to the conditions of the market and may or may not be higher than fixed rates from time-to-time; Hence, the EMIs can go high or low depending upon the current floating rates as defined by the banks periodically.
Despite of being different in nature, both Fixed ROI and Floating ROI are linked to the MCLR Rates as calculated by the banks/FIs time to time. However, the RBI defines a minimum limit to the mclr rate annually which each and every bank has to follow when deciding the interest rate either for fixed rate personal loans or floating rate personal loans.
The minimum interest rate offered by any bank is 10.75% as per the current interest rate offerings in the indian banking industry. It is notice that the banks/FIs tends to offer slightly lower interest rates to pensioners as compared to salaried and self-employed borrowers. Moreover, the interest rates applicable on unsecured personal loans is always higher than secured personal loans. It can also vary according to the facility one is availing on their existing personal loan, such as interest rate is usually 1% lower in case of personal loan balance transfer than the interest rate applicable on the existing personal loan, and upto 1% higher in case of personal loan top-ups.
Concession on Interest Rates
Most the banks and financial institutions these days, offers concession on interest rates to women borrowers and senior citizens, and sometimes to the borrower who have existing relationship with the bank/FI, availing personal loan above a certain loan amount or have a specific professional qualification. This concession varies from bank to bank and is usually ranges between 25 bps to 50 bps, i.e. 0.25% to 0.50% on the existing rate of interest.
The lock-in period on a personal loan is what defines how soon the borrower can close the loan account or start paying larger sum against the remaining loan amount, transfer the personal loan outstanding balance to another bank or avail additional funds.
Prepayment (Foreclosure / Part-Payment)
In case of prepayment facility, either foreclosure or part-payment, the minimum lock-in period that a borrower has to serve is 12 months after the disbursal of the loan amount. Only very few banks/FIs allows its customers to prepay their personal loan earlier than this period such as Capital First offer lock-in period of only 6 months and Bajaj Finserv allows its customer to prepay as soon as 1 month after the disbursal. However, option of foreclosure / part-payment is subject to the chosen bank and may or may not be offered by the bank.
In case of balance transfer on personal loan, a borrower has to serve a minimum 6 months of regular repayment period before he/she can opt for balance transfer facility.
As for the top-up personal loan is concerned, most of the banks offers a minimum lock-in period of 12 months, and only after serving this period the borrower is eligible to avail additional funds over their existing personal loan. However, only a couple of banks/FIs offers lock-in period lower than this, such as Kotak Mahindra Bank allow it's personal loan borrower to avail top-up loan facility as soon as 9 months after the disbursal of the loan amount.
It is important to know that if a borrower tends to make defaults usually or have a high credit risk profile, the bank/FI may reject his/her application to opt for any of the facilities mentioned above even after serving the applicable lock-in period.
When it comes to the charges applicable on personal loan, there are various other type of charges apart from the applicable interest rate a borrower has to pay according to the situation such as processing fee, foreclosure/pre-closure charges, part-payment charges, and late payment fee etc.
Processing fee is the third important component of a personal loan, after principal outstanding amount and interest rate. The banks/FIs charge processing fee in respect of various expenses they have to make in order to approve a borrower such as manpower used for verification of the borrower, checking their credit profile and also the cost they has to pay in order to verify as well as maintain the documentation for the loan.
However, in some case, bank may not levy processing charges to the borrower such as many banks/FIs offer zero processing fee offers to the senior citizens and pensioners. The bank or financial institution may ask the borrower to pay processing charges in upfront by cheque at the time of approval. In case of rejection, the bank may deny to repay the processing fee at all or pay a portion of the processing fee back to the borrower, depending upon their guidelines.
Or, some of banks/FIs abstract the processing charges from the sanctioned loan amount at the time of disbursal. In this case, the borrower doesn't need to offer any amount as a upfront fee and secured of any loss in term of processing charges on rejection of the loan.
The processing charges levied by the banks, usually ranges between 0.25% to 3% of the sanctioned loan amount. However, few of the banks/FIs charges processing fee as high as upto 6.50% of the loan amount. It is important to know that processing charges are tends to be higher in case of availing a personal loan from a private lender.
The foreclosure charges are applicable are levied on the borrower if he/she wants to pay off the personal loan at one go after serving the lock-in period. This charges are paid in respect of the adjustments a bank/fi has to make such as change in loan documentation but mainly against the loss in interest rate amount the bank has to bear due to the closure of the loan earlier than the term decided. The foreclosure charges may be negotiable when it comes to Floating Rate Personal Loans, but tends to be higher in case of Fixed Rate Personal Loans.
The foreclosure charges levied by the banks/fi depends upon how much tenure the borrower has served, such as if the foreclosure is made between 12 months to 24 months, 24 months to 36 months and so on. As for the applicable charges are concerned, it usually ranges between 1% of the principal outstanding amount to 7% of the principal outstanding amount, depending upon the tenure served after the disbursal. However, few banks/FI also offers zero foreclosure fee offers depending upon the nature of the job such as Bajaj Finserv offers zero foreclosure charges to self-employed for self-employed personal loans, and to individual salaried engineers / chartered accountants who are foreclosing their personal loan after 1 month of disbursal.
Similar to the foreclosure charges, the part-closure charges are levied to the borrower in respect of the interest loss the bank has to bear and change in the documentation. The part-closure charges levied by the banks/FIs are negotiable in case of floating rate personal loans but are usually higher in case of fixed rate personal loans.
The part-payment fee also ranges between 1% of the prepaid amount to upto 5%. However, some of the banks, offers zero part-payment charges depending upon the remaining tenure as well as the nature of borrower's job i.e. whether he/she is a salaried, self-employed or a pensioner.
Default charges or also known as "Penal Interest" and generally known as "Late Payment Charges" are levied by the banks to the borrowers, when the borrower fails to pay the monthly installment by the time of payment due date. The banks/FIs charges an additional interest of 2% per month (24% per annum) as a penalty of making a default on personal loan. Moreover, very few banks/FIs charges a flat amount in addition to the penal interest such as Standard Chartered Bank levies a flat fee of Rs. 495 along with 2% penal interest per month. Exceptionally, only a couple of banks/FI doesn't charges any cost against the due payment like Citibank.
The eligibility of a borrower is what defines if he/she would be able to avail the personal loan from the lender or would get rejected. It compromises of few important factors, defined as follow:
The income criteria majorly defines how much loan amount one can get. The banks/FIs usually have a preset limit to the minimum income a borrower need to have in order to be eligible to avail the personal loan from the bank/FI.
The minimum income/salary criteria defined by the banks/FIs varies according to the working profile of the borrower, category of the current organization and especially based upon the current location of the borrower. The salaried borrowers living in Tier-I cities must be earning a minimum salary of Rs. 18,000 to Rs. 25,000 per month and minimum Rs. 12,000 to Rs. 18,000 for ones living in Tier-II cities. Whereas, the monthly salary criteria is 25% to 40% higher for the employees of smaller companies/organizations categorized than larger companies/organization which are deemed to be finaincly more stable.
Based on the current salary or income the borrower have along with the existing obligations, bank/FI determines the FOIR (Fixed Obligations to Income Ratio) which is directly linked to the maximum loan amount one can avail. The FOIR is the difference between all the existing obligations including the proposed EMIs and the net income of the borrower.
The age of the borrower at the time of loan application is what tells if the borrower would be eligible for the personal loan or not. The banks/FIs have set the minimum age criteria depending upon the working profile of the borrower, such as a salaried borrower should be at least 21 years old at the time of loan application, whereas the self-employed applicants should be between 23 years to 25 years to be eligible for the personal loan. However, few banks/FIs like co-operative banks have comparatively lower criteria for minimum age which is at least 18 years at the time of loan application, especially in case of non-incomers like housewife and students.
As for the maximum age is concerned, borrower should not be more than 60 years old at the time of loan application if salaried whereas the self-employed borrower cannot be more than 65 years. However, few banks/FIs have slightly higher age criteria when it comes to the maximum age limit. The maximum age specifically matters in case of a salaried borrower since banks/FIs avoid to offer the personal loans to the borrower who are close to the retirement age.
Typical Employment & Income Stability
When it comes to personal loan for salaried borrowers, the total number of years of employment one has served into his/her current organization, do typically impact the loan eligibility in terms of stability with their current organizations. The frequent changes in employment reflects the instability of the borrower in his/her current job, which usually tells the banks/financial institutions the fluctuations a certain borrower may have in their current salary and less opportunities of the growth of the salary/income at the same working profile.
The frequent changes in employment also impacts the professional stability of the borrower and tells the banks/FIs that the borrower is unable to find the peace in work; Hence, there can be point that he/she will switch to a different kind of profession/industry.
Occupation Type & Growth Prospects
The nature of profession one is involved within, shows the banks/FIs how stable they would be in their current industry, be it salaried or self-employed. The changes in profession/industry reflects that the borrower may lack the peace of mind he/she may expect from his/her profession, and most likely to have different earning scale due to the difference in nature of the occupation.
Based on the occupation type, the banks/FIs can also make an assumption on how likely the borrower to have a chance of earning higher income/salary in the near future.
Typical Residential Status
The residential status of a borrower typically reflects how stable the borrower is in his/her current location. The frequent changes in residential status reflects that the borrower is most likely to not hold any assets especially in terms of property.
The credit score is one of the primary factor which affects the eligibility of your personal loan. It reflects the credit risk profile of a borrower, and ranges between 300 to 900 in increasing order. Depending upon what credit score a borrower holds at the time of loan application, the banks/FIs decides whether the borrower should be offered the requested loan amount, lesser loan amount or should be rejected. The components that affects your credit score directly, includes the lending behaviour of the borrower, spending against liabilities like utility and electricity bills as well as the lending pattern and scale of the borrower.
Within the range between 300 to 900, the credit score of 750 point is considered good for any kind of lending. However, the higher the credit score one have, the higher the chances of being approved for the desired loan amount he/she have. Although, private lenders sometimes lend to borrowers with credit score as low as 650 as long as the borrower can provide some security.
As of now, there are many credit rating agencies available in India, out of which CIBIL, CRISIL and Experian are most popular ones.
Number of Dependants
The number of dependants one have in-directly affects the personal loan eligibility. The more number of dependants a borrower have, the more it reflects to the banks/FIs that the borrower have comparatively lower savings than one who have less number of dependants. Even, in some cases, banks/FIs denis to lend to the borrowers who are living in an undivided family due to the chance of high number of dependants.
Types of Personal Loans
Unsecured Personal Loans
Unsecured loans are the most popular and demanding type of personal loans since borrower doesn't need to provide any collateral security in order to avail the funds. Personal loans are mostly considered to be unsecured personal loans. Since, there is no requirement of security, the eligibility criteria for unsecured personal loans is comparatively higher than secured personal loans and banks/FIs are at direct risk when it comes to the recovery of the loan amount. However, the banks/FIs can take a legal actions against you. Thus, it becomes more complicated for lenders and have more chances of rejection of the loan application.
Approval of an unsecured personal loan typically depends upon the creditworthiness of the borrower. The borrower may get rejected even if they have high income but bad credit score. One of a popular type of unsecured personal loan is credit cards where cardholder is given a preset credit limit and has to pay the used amount or a fixed portion of it by the payment due date. Failing to do directly impacts the credit score and repayment history of the cardholder.
The interest rate for unsecured personal loans is usually higher than secured personal loans and tends to increase upwardly against the lower loan amount. The unsecured personal loans are most suitable for borrowers who holds good or above credit score, and have stable and growing income/salary but either doesn't have any security to offer or don't want to put their assets to risk.
Secured Personal Loans
Secured personal loans are the kind of personal loans where borrower provides a collateral security. The type of security which are easily accepted by the banks/FIs includes fixed deposits, RBI Bonds, LIC Policies, NSC (National Security Certificate), KVP (Kisan Vikas Patra), mortgage of property such as agricultural land or plots and gold jewellery etc.
In case of secured loans, the banks/FIs are entitled to liquidate the security if the borrower fails to pay the monthly installments after 90 days from the payment due date as per the loan agreement signed by the borrower at the time of loan sanction. Hence, banks are usually at low risk and the chances of approval are higher as compared to unsecured loans.
The interest rates on secured personal loans are usually lower than unsecured personal loan and even in case of secured personal loans against fixed deposits, the interest rates are just 1% higher than the interest rates borrower earns on the deposit amount.
The secured personal loans are most suitable for borrower who either have bad or zero credit score. Or, if the borrower is a non-incomer / senior citizens since the lenders don't necessarily required any proof of income. Some of the popular types of secured personal loan are -
- Gold Loans
- Mortgage Loans
- Loans against Insurance Policies
- Loans against Shares / Mutual Funds, and
- Loans against Deposits
Other Types of Personal Loans
Payday loan is a type of unsecured personal loans, sometimes also known as "Salary Loans", where a salaried borrower can avail an amount smaller or equal to their current monthly pay from the lender till he/she receives his/her next salary or usually 30 days period. Hence, it tends to be short in terms of tenure. This kind of loans are most likely to have high interest rates as compared to the regular unsecured personal loans offered by the banks/private lenders, but most suitable for borrower who have very bad credit score or no credit history at all. The agencies which offers the payday loans are usually small in size, as compared to banks/financial institutions but fastly growing due to the high number of requirements.
In term of documentation required to avail the funds, the payday loans are much easier to avail since the borrower doesn't need to go through any typical documentation process and can simply apply by providing his/her contact number along with bank account documents, latest salary slips, an identity proof number such as Aadhar / PAN Card etc and Employee ID Card which can be uploaded in the PDF format through the app.
The borrower can simply be approved on the basis of the current income and the bank account and receive the funds almost instantly in his/her bank account. A borrower can simply avail the funds anywhere anytime by simply applying online for the loans using their mobile phones. Unlike regular unsecured personal loans which have monthly installments, in case of payday loans, the borrower has to offer a post-dated cheque so the borrower can withdraw the money as soon as the funds are available.
The typical loan amount range in case of salary loans can be between Rs. 5,000 to upto Rs. 1 Lac. Whereas the eligibility criteria for these kind of loans are as follows -
- Age: Minimum 21 Years to Maximum 58 Years.
- Work Experience: Minimum 1 Year
- Salary: Minimum Rs. 20,000 per month
Line of Credit
Line of Credit is another type of unsecured personal loans where the borrower is assigned with a credit limit by the lender which he/she can utilize as per the requirements. However, unlike the salary loans, the borrower has the option to repay the used amount in monthly EMIs just like regular personal loans. Although, the borrower only pays interest rate only on the used amount from the assigned credit limit, but the applicable interest rates are usually higher as compared to regular unsecured personal loans. Moreover, similar to salary loans, the borrower don't need to have a credit score in case of the line of credit.
The typical size of line of credit offered by a lender ranges between Rs. 10,000 to Rs. 1 Lac where the minimum amount the borrower can withdraw at a time cannot be less than Rs. 5,000. Whereas, the repayment period can be minimum 3 months or above, subject to the maximum of 12 months. In case of line of credit, the lender collects the repayment by Auto debit or NACH facility. Hence, the borrower must provide the authority to the lender for the same at the time of application and essential for approval. Or, the borrower can also repay using the netbanking or debit card. Similar to regular personal loans, the borrowers are given with the facility to prepay the amount and attracts the prepayment charges ranging around 2.5%. Whereas the applicable interest rates ranges between 1.5% to 2.5% per month in addition to a one-time processing fee of upto Rs. 500. Additionally, an act of default attract a fee of upto Rs. 500 in case of auto-debit and 2% to 4% of additional interest along with charges of at least Rs. 100 against bounce EMI.