A Quick Guide to Choose the Best Personal Loan

23 Apr 2021 5 min read
Personal Loan: A quick guide to choose the best personal loan

Description

Loans are the best way to resolve planned and unplanned finance requirements. Requirements differ from time to time and age to age. There are numerous types of loans like Personal Loan, Education Loan, Home Loan and many others that are categorized according to the domestic requirements. Moreover, Education Loan, Vehicle Loan, Home loan and others come under the planned category. A personal loan is unsecured and has fewer eligibility criteria for approval. The approval process of a personal loan is not more than 5 working days, even some banks give approval within 24 hours.

Following are the reasons for taking a personal loan:

  • Weddings arrangement
  • Home Revocation
  • Land Registry
  • Home furniture
  • Down payment for new car
  • Medical Emergency
  • Business Expansion
  • Vacation Trips
  • Valuable gifts
  • Credit Cards Bill

Three basic principles that need to be followed when you are planning to loan are listed below:

  • Defined Requirement- Evaluate your requirement and fix the amount you want from the lender. Well-defined requirements will help you go through different loan offers from different banks.
  • Loan Eligibility- Examine the loan eligibility criteria thoroughly as the bank will also approve loans on the basis of these criteria.
  • Repayment Schedule- Plan your repayment of the loan systematically as it is directly connected with your future loan approval. 

Personal Loan Eligibility Criteria (Salaried Class)

Age Group

21 years to 60 years

Minimum Monthly Income

Rs. 1,500

Work Experience 

6 months with current organization

Personal Loan Eligibility Criteria (Self-Employed Applicant)

Age Group

25 years to 65 years

Minimum Annual Turnover

Rs. 15,00,000

Minimum Profit excluding Tax of Previous financial year

Rs. 2,00,000

Minimum Business Experience 

3 years

Tips to keep in mind while applying for a personal loan: 

  1. Select the product according to your requirement
  2. Compare product with other banks and financial institutions
  3. Read loan offers, loan eligibility, and other information like documents required, repayment schedule, and more
  4. Always believe in written documents, verbal assurance doesn’t have any space in money matters
  5. Submit verified and clearly visible financial documents
  6. Beware of late repayment & maintain a credit report

Documents required for a personal loan (Salaried Class)

  1. Residence Proof
  2. Identity Proof
  3. Pan Card
  4. Bank Statement of last 3 months
  5. Income Proof of last 3 months
  6. Photographs passport size

Documents Required for Personal Loan (Self-Employed)

  1. KYC Documents: Identity Proof, Residence Proof, Birth certificate matched with Aadhaar Card

  2. Firm address proof

  3. Financial documents 

  4. PAN card

  5. Bank statement of last 6 months

Tips to Improve Personal Loan Eligibility

Verified Documents 

Identity Proof, Residence Proof, Birth certificate matched   with Aadhaar Card

Maintain Credit Score

These numbers vary from 300 to 900

Reduce Current Financial Liabilities

Maintain your monthly & annual income 

Introduce Co-borrower

Apply with co-borrower (close family member), by this you can share loan criteria

Tips for choosing the best personal loan:

  • Product Comparison- Before you start, your loan application process compares the benefits and features with products of other lenders. Since all the lenders are in the market showcasing different features and USPs of their product. Let us understand with the help of an example, Ms. Shivani is a single mother and urgently needs  to purchase a laptop for her daughter. She requires almost 1 lakh rupees. Ms. Shivani zeroes down the decision to fulfill this requirement by taking a personal loan. In this process, she finalized one of the lenders. But before furnishing the verification documents she researched and got to know that the processing charge of lenders bank is comparatively on a higher side. She negotiated this with the bank and got the best offer. This can be done only when you compare and research the features of different lenders. Similarly, Mr. Raju wants to take a personal loan for his daughter's admission, he also before submitting the documents checked features with other banks and found that the interest rate was high in comparison to other banks. Mr. Raju approached the bank with a lesser interest rate. These two case studies show that one has to be aware and compare with different lenders to get the best offer.

Personal Loan Interest Rate and Processing Fee Comparison

Bank

Interest Rate

Processing Fee

SBI

9.60%

1.00%

HDFC

10.50%

Up to 2.50%, Min Rs. 1,999

ICICI

10.75%

Up to 2.25% of Loan Amount

AXIS 

10.49%

Up to 1.75%, Min Rs. 4,999

KOTAK

10.40%

Starting from Rs. 999

RBL

13.99%

Up to 2%

BAJAJ FINSERv 

12.99%

Starting from 1.50%, Up to 3%

IDFC FIRST BANK PERSONAL 

10.49%

Up to 2.00%

TATA CAPITAL

11.25%

Up to 2.50% of Loan Amount

IIFL

12.99%

1 - 2%

HDB FINANCIAL

13.99%

Up to 2% of Loan Amount

KARUR VYSYA BANK

12.00%

0.40%

MUTHOOT

14.00%

2.5-3.5%

YES

10.40%

Min. Flat Rs. 2,021

STANDARD CHARTERED BANK

11.50%

1.00%

UNION BANK OF INDIA

11.00%

0.5%, Min Rs. 500

CANARA BANK

13.00%

0.50%

BANK OF MAHARASHTRA

10.85%

1.00%, Min Rs. 1,000

FEDERAL BANK

11.49%

0.5%, Min Rs. 500

SYNDICATE BANK

13.40%

0.5%, Min Rs. 500

BANK OF BARODA

10.50%

2%, Min Rs. 250

PNB

8.95%

1.8% + Taxes

INDIAN OVERSEAS BANK

11.50%

Rs. 204 Per Lakh

INDIAN BANK

11.05%

0.5%, Min Rs. 508

CORPORATION BANK

12.95%

1.5%, Min Rs. 500

N.B:- Subject to change

Flexible Repayment

The Flexible repayment feature is very important in a personal loan case. This means that if you have excess funds and you want to close your personal loan before the tenure then with the help of a flexible repayment option, you can pay with foreclosure fees.  This foreclosure fluctuates from bank to bank, so you have to compare this flexible repayment option earlier before applying for the personal loan. Above we have discussed Ms. Shivani’s case for processing charges. After discussion with the lender, she got a good offer and she proceeded for the loan. Now, after some time she got a promotion bonus, and she wants to close the loan, but this time it’s not a win-win situation as the bank doesn’t have a flexible Repayment feature with this product.  Ms. Shivani has to continue her loan and pay almost Rs. 5,000 to Rs. 10,000 extra.

Foreclosure charges of some of the leading banks: 

Bank

Foreclosure charger

HDFC

Up to 4%

STANDARD CHARTERED BANK

2% to 5%

KOTAK

5%

ICICI

5%

YES BANK

4%

SBI

3%

N.B:- Subject to change

Tips to calculate EMI 

A loan is an amount given by the lender with the assurance that the client will return the amount in the given time frame. To make it simple and to avoid financial burden the lender has given the option to pay the amount in regular intervals. This means the lender has divided the amount and calculated interest in the given time and the client has to submit that amount in a decided time frame. So the amount given back to the lender every month till the loan amount is totally paid in installments, which is called Equated Monthly Installment (EMI). Broadly Equated Monthly Installment comprises interest and principal amount. A simple calculation of EMI is the loan amount and decided interest is divided by the time span.

Formula to calculate EMI:

E= P x r (1+r)n /((1+r)n -1

  • E = EMI
  • P = Loan Amount
  • r = rate of interest calculated on a monthly basis
  •  (i.e., r = Rate of Annual interest/12/100. If the rate of interest is 13.65% per annum, then r = 13.65/12/100=0.0011375)
  • n = tenure / number of months

For example, if the loan amount is Rs. 10,00,000 at 13.65% interest for a tenure of 5 years then if you apply the formula you can calculate EMI 

  • E= P x r (1+r)n /((1+r)n -1
  • E=10,00,000X0011375x(1+0011375) 60/{(1+0011375)60 -}
  • EMI= 23,087

Besides this formula, nowadays banks and financial websites have designed app-based software for which you calculate your EMI in easy 3 to 4 steps. For a software-based calculator, you have to provide 4 to 5 information which is shared below:

  • Loan amount
  • Rate of Interest
  • Loan tenure 

Follow the instructions given by the app and you will get your EMI. 

Be Careful while choosing EMI

A personal loan is the best solution for emergency fund storage, but we have to be very careful while going for a personal loan, as part of your regular income will go to the lender in the shape of Equated Monthly Installment (EMI). So before going for a personal loan first calculate your monthly expenditure, check your financial paying limit for the whole repayment tenure, and then only apply. This can be understood with the help of an example; Mr. Raju has decided to go for a Rs 10 lakh loan at the interest rate of 13.65 %. The tenure he decided is 5 years. Mr. Raju has to pay Rs. 23,087 for 60 months. For the first 5 months, EMI transition was on time but after 6 months EMI payment got delayed and got even bounced. The main reason for this situation is the miscalculation of monthly expenditure. And this miscalculation leads Mr. Raju to be a loan defaulter, So before going for a loan, you need to first calculate your monthly expenditure and check your financial paying limit.

Be Careful while choosing loan tenure

Lesser amount of EMI is always attractive to borrowers, but try to understand that if you are paying lesser EMI this means the loan is for a longer tenure and you are paying more interest. So it is always sensible to choose the shorter tenure, which is within your monthly expenditure. The below chart will explain the difference between amounts in different tenure.

Loan 

Interest

Tenure

EMI

5,00,000

10.5

20

4,992

5,00,000

10.5

10

6747

5,00,000

10.5

5

10,747

Reasons for PL Rejection

  1. Incomplete & Non- verification of Documents- One of the major reasons for loan rejection is incomplete documents. Loan approval and verification are done on the behalf of these documents and if documents are incomplete or not clear then you will not get approval.
  2. Negative Credit Profile- Credit score numbers vary from between 300 to 900. The chance of approval of a loan is higher when a credit score is more than 600 and near 900.  To maintain credit score avoid late payment and EMI bounce.
  3. Current Financial Liabilities- Current Financial Liabilities need to be stable and if it is very much on the higher side then getting approval of the personal loan is very difficult. The lending bank will not be comfortable in giving the loan approval to such cases. 
  4. Monthly/Annual Income/ Turnover- Lender or bank has a benchmark of monthly or annual income for salaried class and Annual turnover for self-employed. If your loan application is not meeting that mark, your file is likely to get rejected.
  5. Job Stability- Stable workplace with a regular and stable income is one of the guarantees of getting loan approval. The lender bank does not like changing jobs frequently, this also reflects in your financial statements.

Now at the end, you can have a look at some of the benefits of availing of a personal loan:

  • No security deposit
  • Minimum documentation for approval
  • Quick disbursement
  • Fixed-rate of interest 
  • Flexible loan tenure 
  • Easy EMI facility is available
  • Multipurpose loan feature

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