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What is a personal loan?

A personal loan is short to a medium-term unsecured loan given to an individual for personal use. The borrower can use the funds in any way they want, typically for personal expenses.

A personal loan is usually quick to obtain and requires minimal documentation to get approved.  Personal loans are ideal for financing business proposals or meeting financial needs like wedding expenses, medical costs, home renovation, etc.

The repayment tenure for personal loans is usually shorter than other loans, ranging from one to five years.

APR (Annual Percentage Rate) for this type of loan can vary from 10.5% to 35%.

Let’s look at an example: If you take a loan of Rs. 4 lakhs at the rate of 15% with a repayment tenure of 4 years, your EMI will be Rs. 11,132. The total payable amount at the end of 4 years would be Rs. 5,34,350. You are therefore paying a total interest amount of Rs 134,350.

In addition to the interest amount, there are some additional charges involved in processing the personal loan application.

  • Loan Processing Charge@2% = Rs. 8000
  • Documentation charges = Rs. 500
  • Amortization Schedule charges = Rs. 200
  • Additional charges are applicable for requests for change in payment mode and swapping Post Dated Cheques.
  • Furthermore, depending on the lending institution, prepayment options may or may not be available, and charges may vary.

Eligible Entities

  • Salaried individuals
  • Employees of private and public limited companies
  • Employed by government agencies, including public sector undertakings, local authorities, and central government
  • Essential personal loan eligibility criteria for salaried individuals:
    • Age between 21 and 60 years
    • At least two years of work experience
    • A CIBIL score of 750 or above
    • A monthly salary of ₹25,000 or more, depending on the lender you choose
    • Employed by both private and public companies
    • Employees of the public sector, including those of central and local government.

 

Fees & Charges

Common Charges and Fees Related to Personal Loan:

When you apply for a personal loan, when processing a loan, a bank bears costs related to administration. However, this amount is relatively tiny and often varies between 0.50% and 2.50%. The processing charges for a personal loan depend on the bank, so an individual applying for a personal loan can choose from (1) Payment in full. (2) Deducted from the actual loan amount at the disbursement.

The applicant will have to bear an additional cost to get the loan sanctioned and approved by the bank. This extra cost is known as verification charges. These charges are paid to a third party the bank hires to verify the applicant’s credentials. This verification helps assess the applicant’s eligibility and improve the applicant’s credit history and credit score. The verification charge has to be paid by the applicant.

GST is a tax imposed on the supply of goods and services in India. GST will replace all indirect taxes levied in India by having a single point at which every good and service can be taxed. It will be a comprehensive, multi-stage, destination-based consumption tax. It is the only tax on the supply of goods and services. GST was designed so that it can be easily implemented after the rollout of the Goods and Services Tax Network.

Delaying the payment of any EMI would result in a penalty on the late payment of EMIs. The RBI has approved penalty amounts in case a borrower misses his EMIs. The amount, however, differs based on the repayment schedule and type of loan opted by the borrower.

Penalties for prepayment or foreclosure are calculated at 2% to 4% of the loan amount, and an extra charge for each installment paid before time. This charge includes interest on the repayment and the fee charged by the bank for this service.

Each bank charges differently for the provision of duplicate statements. Some banks might charge a nominal fee between 0.25% to 0.50% of the total amount outstanding, along with any applicable service charge. Other banks might charge a flat Rs.200 or even more for every duplicate statement.

Interest Rate

Most banks charge personal loan interest rates between 10.50% to 24% p.a. However, the interest rate you are charged will vary based on several factors such as your credit score, income, company that you are employed with, and age at the time of applying for the loan, etc. Thus, compare the interest rates of different loan providers before applying for a personal loan.