A personal loan is an unsecured loan that you can avail from banks, fintech companies and other non-banking financial companies. Although offered to all earning individuals for a wide range of loan amounts, personal loans are becoming a popular choice of finance among borrowers below the age of 35 and for finance below Rs 50,000. While the personal loan demand fell among the young borrowers due to the pandemic, millennial participation in the personal loan market increased from 27% to 41% in the last two years. The demand for small ticket personal loans had an annual increase of 162% by March 2020.

Statistics – CreditScape-Personal Loans Dec 2020 by CRIF High Mark)

Some of the major benefits of a personal loan include,

• A personal loan application process is quite simple and can be availed with minimal documentation.
• Most banks and NBFCs offer pre-approved personal loans which eliminate the need for loan application processing and eligibility checks.
• Personal loan repayment terms can be reasonably flexible, with a wide range of repayment tenor.
• A personal loan can be availed for any purpose. Unlike most other loans, a personal loan can be used to meet any financial need, be it travel plans, medical expenses, home renovation, debt consolidation or even a temporary cash crunch.
• A personal loan doesnʼt require any collateral security or pledging.

Among the commonly preferred eligibility criteria are,

• The borrower must be within a specified age group, which can be around 18-21 to 60-65 years.
• Predominantly offered to salaried individuals employed with recognised MNCs, public or private companies. Personal loans are also offered to self-employed applicants with proof of business existence, ITRs and other financial documents.
• The applicant must possess the required KYC and other documents.
• Personal loans are generally offered to residents of India only.
• Many lenders have minimum income benchmarks for personal loan approval.
• A specified number of years in employment or business existence is required.
• The CIBIL score of the applicant is also considered while accepting the loan and deciding the amount, interest rate and tenor.

The documentation required for a personal loan mostly comprises of identity, address and income-related documents like,

• KYC documents like Aadhaar, PAN, Voter ID, Passport,driving license etc.
• Employment Identity proof.
• Salary slips.
• Bank statements.
• Passport size photo.
• Income tax return.
• Proof of business (self-employed applicant).
• Financial statements (self-employed applicant).

There are a few important factors that you can consider while selecting a personal loan ideal for you. It includes,

• The amount of EMI that you need to pay every month. This will be determined by the amount of the loan, the rate of interest and the tenor of the loan. For a given loan amount and rate of interest, the EMI will be higher for a shorter loan tenor, and it will decrease as the tenor of the loan increases.
• The processing and disbursal time of the personal loan is important, particularly if the need is urgent. The lending process is generally faster in the case of account holders of the lender.
• The interest rate of the personal loan is an important factor as it will decide your cost of borrowing. Different lenders charge different rates of interest. However, the fluctuations in interest rate is influenced by the interest rate of the RBI.You can compare different lenders based on the rate of interest rate they offer.
• Apart from the interest rate, a loan can involve other costs like loan processing fees, stamp duty, credit assessment fees etc. Your overall cost of borrowing can increase if these incidental charges are on the higher side.
• Personal loans are easily available, but be careful in selecting the right loan amount. Excessive debts can inflate the EMI and affect your repayment capacity. Calculate the amount you need, the EMI that you will need to pay regularly and your existing financial obligations while selecting the loan amount.
• Understand the terms and conditions of the lender while availing of a personal loan. The policy on prepayment,acceptance of part-payment and foreclosure, redrawing of funds, services that are chargeable etc. are some of the terms and conditions typically found in personal loan documents.

Pre-closure of a personal loan can attract a pre-closure/ foreclosure penalty. Ideally, you should familiarise yourself with this charge while applying for a personal loan. You have to also check if your lender allows foreclosure or not.

• In case your lender doesnʼt have an online foreclosure option, you have to visit your nearest branch and fill the pre-closure form.
• You will have to submit your KYC documents, loan documents and bank statement reflecting the latest EMI payments.
• After submitting the form and the required documents, you can make the remaining payment by cheque demand draft or cash.

Here are a few residual points that are worth remembering while applying for a personal loan,

• Donʼt apply for personal loans at multiple places, or in quick succession after rejection. In both cases, your credit score can be affected.
• Always disclose all existing liabilities while applying for a personal loan.
• Donʼt focus on the interest rate alone. Factors like terms and conditions and other charges are also crucial in dictating the cost of borrowing.
• Always go for the affordable EMI rather than the lowest EMI. Lowest EMI generally means the longest loan tenor, and therefore high total interest accrued.
• Find out your loan eligibility before applying for the loan to avoid the trouble of rejection.