A Personal Loan is a general all purpose loan that allows customers to borrow money for almost any purpose like home renovation, marriage-related expenses, a family vacation, children’s education, purchasing home appliances, unexpected medical expenses or for just about any other need or emergencies.

Personal loans are often more difficult to get and may have stricter qualifying requirements. Further being an unsecured loan because there is no security/collateral against it, the interest rates on personal loans are typically higher than those on home, car or a gold loan.

On the other hand a Personal loan can be sanctioned quickly and with minimum documentation and its loan amount range between Rs.0.50 – 50 lacs loan limit and repayment tenure are between 1 to 5 years, depending on the lender and the borrower’s ability to pay back.

Loan approval process

Loan sanction process is very fast in personal loans as the lender does not have to verify any asset however the evaluation is very stringent compared to other loans. The entire process can take anywhere between 2 to 7 days. Once all the necessary documents are submitted and the verification process is completed, the loan, if sanctioned, can get disbursed within seven working days by the bank. For salaried customers where it’s easier to assess salaried income, lenders are even approving and disbursing personal loans online.

Eligibility

Lenders assess Personal Loan eligibility with a combination of factors including customer’s ability to repay customer loan, and other factors like age, residential stability, occupation and credit history.

Important points while availing personal loan.

Rates

Personal loans always have a higher rate of interest than those on secured loans. These days, the best of interest rates start from a minimum of 10.99% p.a. floating to as high as 18-22% p.a. floating as well.

Any charges/fees payable

The lender usually charges a processing fee of around 1-2% on the loan amount. This is typically to take care of costs of all the sourcing, documentation and verification processes that need to be taken care of by the lender as a part of loan processing. A few lenders may also charge a flat processing fee towards acquiring existing personal loan borrowers of other lenders or as part of a promotional strategy or to its existing customers.

Tax benefits

Although personal loans usually have no tax benefits, however, personal loans taken for the purpose of education, construction, repair or purchase of property or for a business get relevant exemptions or given allowance as expense as per the Income Tax Act. In the case of property purchase though, it makes sense for Housing Loans, as they are much cheaper than Personal Loans.

Prepayment Fee

Sometimes, personal loans are availed just to cover up short term to tide over the short term cash flow crunch. In such cases, prepayment of loan is a possibility when the cash flows improve. However, there are heavy prepayment penalty costs imposed by lenders. A very good way of ensuring transferability of loans is to take personal loans under individual names under floating interest regimes, given RBI’s mandate that all floating rate individual loans shall not be charged any fore-closure or pre-payment rates

Negotiate for best rate

Banks are always competing among themselves to woo credit-worthy borrowers. So negotiating with your lender should largely involve bargaining for a better rate on the loan deal. Even a fraction of a reduction in percentage could result in substantial savings leading to a reduction of the financial burden.

Read loan agreement details carefully

Customers should always read the loan document thoroughly before signing. Look for the fine print. Look out for the charges, fees and penalties which may lead to trouble in the future.