Personal Loan Guide

A personal loan is an easy way to finance big or small needs. You can borrow the desired amount and spend it for the cause. The repayment can be made slowly over the next few months in small amounts. So, you don't need to break a fixed deposit or dig into your retirement fund. Besides, you can plan your budget to repay the borrowed money in small installments. Read on to learn all about personal loans, their benefits and features and how to apply for a personal loan.

What is a personal loan?

Let's first learn the meaning of a personal loan. It is an amount of money that you borrow to fund different needs. For example, you may take a personal loan for a vacation abroad, a dream wedding or to consolidate debt. Online lenders, banks and other financial organisations offer personal loans. These loans come with some interest, which is like a fee that you must pay to access the money you need exactly when you need it.

You need to repay the loan and the interest in fixed regular payments called equated monthly instalments (EMIs). Each instalment comprises a part of the principal and some of the interest. The instalment amount is fixed as the interest rate is fixed and predetermined.

When do you need a personal loan?

Now that you know what a personal loan is, let us learn when it can be useful. You can apply for a personal loan to finance a range of expenses. Here are some examples:

• Debt consolidation
• Moving expenses
• Vacation costs
• Wedding expenses
• Unexpected major expenses
• Home renovation and repair work

What are the various types of personal loans?

Here are the most common types of personal loans in India:

• Unsecured loan: This is a kind of personal loan that you can borrow without any collateral or assets. Since this loan is not given against any security, the lender checks your CIBIL score and credit repayment history to determine your creditworthiness.
• Secured loan: As the name suggests, you can get this loan against a certain security deposit or collateral. That can be your property, vehicle, home, other valuable assets or even a fixed deposit. You can speak to the lender to know the acceptable options for collateral. Since this loan is secured, the lender may not assess your credit history or score. If you fail to repay the loan over the specified tenure, the lender has the legal right to take possession of your collateral.
• Personal loan against credit card: You can avail of this loan against the available balance on a credit card.

How to know if you are eligible for a personal loan?

The eligibility criteria for personal loans may differ from one lender to another. Here are the common factors that you must meet to qualify for these loans:

• You need to be an Indian resident since you are applying for a personal loan in India.
• You should be within a certain age group, usually between 18-21 and 60-65 years.
• You must have the necessary KYC and other documents.
• If there is an income benchmark, you need to meet it.
• Some lenders offer loans to both salaried and self-employed individuals. Based on that, you need to submit suitable documents. A specified number of years of business existence or employment may be required. If you are a salaried person, you may have a higher chance of loan approval if you work in a recognised private or public enterprise or an MNC.
• If you apply for an unsecured loan, you must have a satisfactory credit score, a good loan repayment history, and a low debt-to-income ratio. If your credit score is high, you can qualify for a large loan with a long repayment tenure and a low interest rate.
• To apply for a secured loan, you must have an asset of significant value to be presented as collateral for the loan.

How to apply for a personal loan?

If you want to apply for a personal loan online, here are the usual steps to follow:

• Visit the lender's website or app.
• Choose the desired loan amount.
• You may have the option to choose the tenure.
• Check the interest rate that you qualify for.
• Upload the required documents.
• Apply for the loan.
• You will be notified whether your loan application has been approved.
• If approved, the money is transferred to your bank account within hours or just a couple of days.

To apply offline, you need to visit the bank and submit the necessary documents in person. Compared to that, an online personal loan application is paperless, quicker and hassle-free.

What documents are typically needed for a personal loan?

The documents required to apply for a personal loan may vary based on the lender. Usually, the documents are related to your address, identity and income. Here are the documents that are commonly needed:

• KYC documents, such as Voter ID, PAN, Aadhaar, driving license, passport, etc.
• Passport size photo.
• Income tax returns.
• Bank statements.
• Employment identity proof and salary slips (for salaried borrowers).
• Proof of business and financial statements (for self-employed borrowers).

What are the benefits and features of personal loans?

Personal loans have these features and benefits:

• Flexibility of use: Unlike a home loan, medical loan or car loan, you can use a personal loan for any purpose without even specifying to the lender. You can use it to buy an expensive gadget or jewellery, host a wedding, take a long vacation, move home, pay for higher studies, or even consolidate existing debt. In short, this kind of a loan can help you resolve an immediate cash crunch.
• Flexible loan amount and tenure: You can borrow any desired loan amount based on your needs. The more your creditworthiness, the higher the loan amount you qualify for. The loan tenure, or period over which you can repay, is also flexible in most cases. So, you can choose a suitable tenure that gives you an affordable EMI amount.
• Basic documentation: Only a limited number of documents are needed to apply for a personal loan. The required documents are often fewer in an online application process. This helps save time for loan approval. This is very useful when you need the loan quickly, for an emergency.
• Paperless process: If you opt for a personal loan online, you can also enjoy smooth and fast paperless documentation. So, you don't have to gather the physical documents or make photocopies of them. You can simply scan and upload the documents on the lender's app or website, and they will be verified digitally. This reduces the risk of losing any physical document.
• Fast disbursal: The time for loan disbursal depends on the lender. It usually ranges from 24 to 72 hours. This makes personal loans the best option for urgent need of money. You can get a quick loan approval and disbursal by satisfying the eligibility criteria and applying online. Sometimes, a loan may be preapproved, which means you can get an instant disbursal. This is mostly in the case of online personal loans.
• Pocket-friendly repayments: This is among the most beneficial feature of personal loans. Since you don't have to pay the entire loan amount at once, it does not impact your monthly budget. You can repay it in small, pocket-friendly EMIs. Moreover, if you qualify for a long tenure, your EMI amount becomes even smaller and easier to pay.
• Attractive interest rates: You can qualify for a low interest rate if you have a good credit score, a low debt-to-income ratio and a verified stable income. Different lenders offer different interest rates. By meeting these criteria, you can improve your chances of getting a personal loan with the best interest rate. This would make the EMI amount more affordable, and you can repay the loan faster.
• Tax benefits: You can also claim a tax deduction when you use a loan to pay for any expense. According to Section 24B of the Income Tax Act of India, the maximum benefit amount is ₹2 lakhs. To avail of this tax benefit, you need to show the necessary documents to prove that you have used the loan for a specific purpose.
• No collateral needed for unsecured loans: If you qualify for an unsecured loan, you don't need to provide any collateral.

How are EMIs calculated?

When you apply for a personal loan, the EMI amount is disclosed right away, based on the principal, interest rate and tenure.

If you still wish to verify the EMI amount, learning the following formula can be helpful.

EMI = P * r * (1 + r) ^ n / ((1 + r) ^ n - 1)

Here:

• P = Principal loan amount
• r = Monthly rate of interest
• n = Loan repayment tenure in months

Although this formula helps calculate your EMIs, you can use an online EMI calculator to save time and avoid human error. These digital calculators are already programmed with the formula and can give accurate results in seconds.

How to pay the EMIs?

You don't have to visit the bank to pay your EMIs in cash. You can provide postdated cheques to make the payments. Alternatively, you can use online payment modes that are convenient and swift. You can pay the EMIs using your debit or credit card, net banking or UPI payment apps. To make things easy, you can even initiate auto-debit from your bank account on the due date of your EMI payments. That way, you won't forget or miss any payment.

How to get the best personal loan?

You can get the best personal loan with an attractive interest rate and other benefits if you:

• Have a high CIBIL score (usually 750 or above)
• Have paid off earlier debt and built a good credit history
• Have a low debt-income ratio
• Have a high-worth asset (to opt for a secured loan)
• Meet any specified income benchmark
• Provide all the required documents
• Have a steady and high flow of income that can be verified

What fees or charges do personal loans have?

The types of loan fees and their percentages vary from one lender to another. Personal loans often have the following charges:

• Processing fee: It is an administration and maintenance fee levied by the lender when the loan is processed.
• Verification charges: The lender may hire a third-party agency to verify your credibility or ability to repay the loan. In this case, you may need to pay the verification charges.
• Fees for duplicate statements: The lender may levy charges to generate duplicate statements of the outstanding loan balance and the payment schedule.

Besides these, there are certain penalties. You can avoid these by repaying your loan on time. The charges are:

• Late payment fees: This fee is charged when you are unable to pay an EMI on time. If you miss a loan payment, ask the lender whether you can get a grace period to clear the EMI.
• Fee for loan foreclosure or prepayment: Not all lenders charge a fee when you pay off a loan before the specified tenure. So, check whether this fee is applicable.

How to pay off a loan fast?

You can repay a loan fast if you:

• Have cleared an earlier debt
• Apply for a small loan amount
• Qualify for a low interest rate
• Are allowed to foreclose a loan (repay before the due date)

What are the benefits of repaying a personal loan on time?

If you repay a personal loan within the stipulated tenure, you can:

• Increase your credit score
• Improve your credit history
• Easily qualify for more types of loans in the future (like a home loan or a credit card)
• Qualify for a lower interest rate on your next loan
• Be eligible for a bigger loan amount

Things to do when applying for a personal loan

Keep in mind the following when you apply for a personal loan:

• Choose a trusted lender.
• Apply on the lender's mobile app or website for faster approval.
• Apart from attractive interest rates, enquire about other loan benefits.
• Learn about all the fees.
• Ensure that your credit report is error-free.
• Build a good credit score and history to increase your chances of loan approval.

Now that you know how a personal loan works, apply for it to fund your expenses and pay it off on time.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.