An increasing number of consumers now are availing of personal loans, particularly the big-ticket ones. Also, they are converting their purchases into EMIs (equated monthly installments). Personal loans assist the household in mitigating the shortfalls they witness in purchasing a home or car, in cases of medical exigencies, in children’s higher education, etc. Here’s a detailed elaboration on personal loans to understand this option better.
What’s a personal loan?
To put this simply, a personal loan is an unsecured credit option from NBFCs and banks to mitigate your personal requirements. It is offered based on key parameters like credit & employment history, income level, repayment capacity, etc. May it be a Bank of Baroda personal loan or a personal loan through any other bank, these key parameters are always followed by the lenders.
Unlike a car or home loan, a personal loan is an unsecured loan. Given it is an unsecured loan, you do not require putting up security or collateral like property or gold to avail it. The personal loan interest rate is higher than secured loan options like home loans, gold loans or car loans because of the higher perceived risk when disbursing them.
For instance, the Bank of Baroda personal loan interest rate range between 11.45 % and 17.05 % p.a., while the Bank of Baroda home loan interest rate range anywhere between 7.95 % and 9.30 % p.a. However, like any other credit option, defaulting on personal loan has its adverse implications as it would indicate your credit report and cause issues when you place an application for loan and credit cards in the future.
For what purposes can it be utilized?
It can be utilized for any personal financial requirement, and the bank will not monitor its usage. This can be used for renovating your home, family vacation, marriage-linked expenditures, buying your latest electronic gadget, family vacation or home appliances, mitigating unanticipated hospital expenditures or any other exigencies.
A personal loan is also beneficial when it is about investing in the business, fixing the car, making a down payment on the new home, etc.
While it differs from one bank to another, the general parameter involves your age, income, occupation, capacity to make repayment of loan and residential place. To get a personal loan, you must hold a regular source of income, whether you are a salaried, self-employed business individual or professional. Your eligibility is even impacted by the business you are employed with, your credit history, etc.
Highest loan duration
It may be between 1 and 5 years. Longer or shorter repayment tenures might be permitted on a case-to-case basis, but it is extremely rare.
Disbursal of loan proceeds
Typically, it gets processed within seven working days of loan application to the lender. Once approved, you might either get an account payee cheque or a draft equivalent to loan proceeds to get the fund deposited automatically in your savings bank account electronically.
How much can you borrow?
It generally depends on the income and differs based on whether you are self-employed or salaried. Generally, banks limit the loan proceed like your EMI is not over 40 to 50 per cent of your month-on-month income. Any existing loan that is serviced by you is even considered when computing the personal loan proceeds.
Are there minimum loan proceeds?
Yes, while the exact amount differs from one lender to another. Most lenders have set their minimal personal loan principal proceeds at Rs 30,000.
From which financial institution or bank must you borrow?
It is great to compare all the offers of different banks before you settle on one. A few key parameters you must consider when zeroing on the lender include loan repayment tenure, rate of interest, processing charges etc.
How do lenders determine the maximum loan proceeds?
While the loan disbursement parameter might vary from one lender to another, a few key parameters deciding the maximum loan proceed that can be disbursed to you involve current income, credit score, income, and liabilities. A strong credit score means you have met your past loans and credit card dues completely, which may make lenders feel you are a safe loan borrower, and they may sanction higher loan proceeds.
Your current income and liabilities have a bearing on the repayment capacity. Thus, if you are in a lower income bracket or have a huge proceed of unpaid outstanding loan EMI or credit card dues, you will be disbursed reduced personal loan proceeds than those having a higher income and fewer financial liabilities.
Should you go for the lowest EMI possible when selecting the loan provider?
Low EMI can typically lead to long repayment tenure, a low rate of interest or a combination of 2 parameters. Thus, sometimes, you might end up paying higher interest constituents to your bank if you select low EMIs. So, use online instruments like a personal loan calculator to know your interest over the loan repayment tenure and repayment capacity before taking the call.
Being an unsecured loan, a personal loan has a higher rate of interest than those on secured car and home loans. At present, many NBFCs and banks offer such loans at a rate of interest as low as 11.49 per cent. However, the interest rate applicable to you is contingent on key parameters, including income level, credit score, repayment tenure and loan proceed, etc.
Additional charge payable
Yes. Additionally, to interest payable on principal proceeds, there is a nonrefundable fee on applying for a personal loan. Lender levies processing charges, generally 1 – 2 per cent of loan proceeds to take care of documentation that requires being processed as part of the application procedure. The lender might waive this fee if you hold a long-term association with the bank.
Floating or fixed rate of interest
For fixed interest rate personal loans, EMIs stay fixed. A floating interest rate means that the EMIs keep falling as it follows a reducing balance method of computing interest payout on a personal loan. The floating interest rate is attached to the repo rate.
Paul is an content marketing strategist and serial entrepreneur.