Personal Loan is a form of credit offered by banks and non-banking financial companies (NBFCs) to both salaried and self-employed individuals without asking the applicant to pledge any collateral or security.
The interest rates, loan amounts and loan tenures for personal loans are decided primarily on the basis of their applicants’ credit profiles. Here are some of the main features of personal loans, which every prospective loan applicant should be aware of:
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No End Usage Restriction
Unlike a car loan or a home loan that can be used only to fulfil a specific requirement, loan applicants availing personal loans can use the funds procured for any purpose (except for speculative activities) including financing their education, wedding, travel, home renovation, medical expenses or for purchasing the latest electronic gadgets. Applicants can also use the proceeds generated from their personal loans to manage day-to-day expenses.
Quick Processing and Disbursal
The loan processing and sanction/approval process for personal loans are usually quicker than other lending products like home loans or car loans. Most personal loan lenders claim to offer loan disbursal within a week of making the personal loan application through the physical mode. Many banks/NBFCs also offer 100% online process for their personal loans right from the loan application process to disbursal, which reduces their turnaround time for personal loan disbursal to a few days.
Pre-Approved Loans to Select Existing Customers
Many lenders offer pre-approved instant personal loans to their select existing customers having good credit profiles. As banks/NBFCs offer pre-approved loans to their existing customers, such loans are offered to eligible applicants with instant disbursal and zero or minimal documentation.
Interest Rates
The interest rates offered on personal loans by private lenders usually start from 10.49% p.a., with some public sector banks offering personal loans at lower rates of interest. Most public sector banks provide personal loans at floating interest rates while private sector banks and NBFCs usually offer personal loans at fixed interest rates.
Lenders primarily consider the credit profile of their loan applicants while setting the interest rates for their personal loans. Some of the factors considered by the lenders for setting personal loan interest rates include monthly income, credit score, occupation profile, existing relationship with the lender, etc of their loan applicants. As interest rates play a major role in determining the total cost of availing a personal loan, loan applicants should compare the interest rates offered by multiple lenders before applying for personal loans.
No Collateral or Security
Unlike home loans or car loans, lenders offering personal loans do not require their loan applicants to furnish any security or collateral. Lenders approve personal loan applications primarily on the basis of their loan applicants’ monthly income, credit score, occupation profile, etc. This increases the credit risk for the lenders, which leads them to take a more stringent approach for their personal loan approval process than secured loan options.
Minimal Documentation
As personal loans are unsecured in nature, most lenders do not require their loan applicants to submit extensive documentation to avail personal loans. Lenders offering personal loans usually require their applicants to submit documents to establish their identity proof, income proof and address proof. Lenders usually ask salaried applicants to submit their salary slips and bank statements of the last 3 to 6 months as proof of income. For self-employed individuals, the income proof documents usually include their income tax returns (ITR) of the last 2 years, audited financial statements (balance sheet and profit & loss account) and bank statements or passbook of their current/savings accounts of the last 1 year.
FlexibleTenures
The repayment tenures offered for personal loans by most banks and NBFCs usually extend to 5 years, with some lenders also offering tenures of up to 7 years. Lenders usually set the loan tenures after evaluating the repayment capacity of their loan applicants. Lenders usually use the EMI/NMI ratio of their loan applicants to evaluate their repayment capacity. Loan applicants having an EMI/NMI ratio (including the EMI of the proposed personal loan) of up to 50-55% are usually preferred by lenders for personal loans. Loan applicants exceeding this limit can opt for longer tenures to reduce their EMI burden and increase their chances of loan approval.
Conclusion
Personal Loans allow loan applicants to procure funding for their personal, professional or business-related needs (except for speculative purposes) with zero collateral, minimal documentation, faster disbursal and flexible repayment tenures. These features make personal loans an excellent credit option for both salaried and self-employed individuals. However, the applicants should study the features of personal loan schemes of multiple lenders and evaluate their pros and cons before opting for one.
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