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About Personal Loan

Personal Loans: An Overview

A personal loan is a short /medium term unsecured loan (no guarantee/collateral)) that you can avail to meet current financial needs. Though most commonly used to meet expenses related to debt restructuring, vacations, unexpected medical expenses and down payments, a personal loan may be used for practically any type of expense.  Terms and conditions vary as per credit profile of the customer.


For what purpose can I avail a Personal Loan?

Personal loans by definition are loans issued to cover personal expenses which are discretionary in nature. Some of the reasons include:-

• Renovating house

• To meet wedding expenses one of the important and expensive days

• Buy a new gadget

• Holiday with the family

• Pay off credit card bills or other debts

• To meet business requirements 

What documents are needed for availing a personal loan? 

Though the documentation requirements of personal loans vary from one financial institution to another, some of the key documents that you would need to provide with your personal loan application include: 

Income proof (Salary Slip for salaried/recent acknowledged ITR for self-employed)

Address Proof Documents

Identity Proof Documents and others

Certified copies of degree/license (in case of self-employed professional) and others as per the lender’s criteria.

Am I eligible for personal loan?

You must have a consistent source of income to avail a personal loan whether you are a salaried individual, self-employed business person or a professional. A person's eligibility is also affected by the organization/industry he/she is employed with, his/her credit history his/her residential location and other factors as per the lender’s criteria.

What can I use a personal loan for?

A personal loan can be used for almost any type of personal expense ranging from big ticket appliance purchases and home renovations to luxury vacations and debt consolidation. Some other cases where personal loans may be useful include payment to unexpected medical bills, investment in business, fixing your car, down payment of new house and much more. 

Are there any tax benefits if I take a personal loan?

 Personal loans have no tax benefits; however, in case you take a personal loan for home renovations/down payment, you may be eligible for income tax deduction under section 24. However, this tax benefit is limited to only the interest on the loan and not the principal amount.   

Is there a minimum personal loan amount that I need to borrow?

Yes. Though the exact amount of the minimum personal loan amount varies from one lending institution to another, most lenders have set their minimum personal loan principal amount at Rs. 30,000.

How is the maximum loan amount decided?

When deciding the maximum personal loan amount in case of salaried people, the bank/financial institution takes care that the EMI does not exceed 30% to40% of the applicant’s monthly salary.  Any existing loans that are being serviced by the applicant are also considered when calculating the personal loan amount. This ratio is called as (Fixed obligation/Income) rario.  For the self employed, the loan value is determined on the basis of the profit earned as per the most recent acknowledged Profit/Loss statement, while taking into account any additional liabilities (such as current loans for business etc.) that the applicant might have.

What is the difference between reducing and flat interest rate?

Reducing Balance Interest Rate involves the borrower to pay interest only on the outstanding loan balance, i.e. the balance that remains outstanding after getting reduced by the principal repayment. Flat Interest Rate is wherein the borrower needs to pay interest on the entire loan balance throughout the loan term. Thus, the interest payable does not decrease even as the borrower makes the periodic payments (EMIs).

What are the key steps to avail a personal loan?

Once the customer applies for a loan by filling up an application form and providing necessary documentation, it takes up to a week to get the loan. There are institutions who are able to provide same day loans as well typically for existing customers where they don’t need to do much due diligence.

What is credit report and score?

A personal loan is an unsecured loan with no collaterals, hence your credit history usually plays a critical role in the loan approval process. The Credit Bureau (India) Limited (CIBIL) is India’s first credit information company that in collaboration with TransUnion, a global credit reporting agency, maintains detailed records of your credit history including repayment history of all your credit card bills and any current or previous loans. Before approving your loan, the lender checks your repayment track record, existing loans, defaults if any. A good CIBIL score helps you fetch higher loan amount at lower interest rate. Apart from CIBIL TransUnion, other credit scores available in India include those by Experian and Equifax.    

How to decide which bank/financial institution I take the loan from?

It is always a good idea to compare the offers of individual banks before you decide to settle on a specific provider. Moneuyzguru allows you to do exactly this in real time!

Should I always choose the lowest possible EMI when choosing my loan provider?

Low EMIs may or may not indicate low interest rates,  one should look for interest rate, processing fee and turn around time for loan disbursal as key metrics.

Is there any extra charge payable when applying for personal loan?

 In addition to the interest payable on the principal amount, there is an additional non-refundable charge that needs to be paid when applying for a personal loan.  Processing fees, which are usually 1%-2% of the loan principal, are charged by the lender to take care of any paperwork that needs to be processed as part of the personal loan application process. This charge may be waived by your lender in case you have a long term association with the lender.

What are pre-payment/foreclosure charges and how much are they?

In case you decide to settle your loan before the tenure is completed, you get charged an additional fee termed as pre-payment/foreclosure charge/penalty. This penalty usually ranges between 1% and 2% of the principal outstanding; however, some banks charge a higher amount to foreclose a personal loan.

What is the tenure of a personal loan?

Personal loans feature tenure of 1 year to 5 years or 12 to 60 months. 

Can I apply for a personal loan jointly with my spouse?

Yes, personal loan can be applied either by yourself or together with a co-applicant (jointly).The co-applicant needs to be a family member like your spouse or parents.  By getting a co-borrower, your loan application will be processed in a higher income bracket, enabling you to avail a larger loan amount. This however is assuming that your co-borrrower also has a good credit score.

What is relationship discount?

Relationship discount is a benefit that may be provided by the banks or lenders to a prospective applicant if they have a pre-existing relationship with the lender. Such pre-existing relationship may include having a salary/savings account with the bank or having an existing credit card, fixed deposit or loan with the prospective lender.  

How is the personal loan disbursed?

Once you get approved for a personal loan, you may either receive an account payee cheque/draft equal to the loan amount or get the money deposited automatically into your savings account electronically.

How to repay the personal loan?

The loan can be repaid in the form of Equated Monthly Installment (EMI) via post-dated cheques   drawn in favour of the bank or by releasing a mandate allowing payment through the Electronic Clearing Services (ECS) system.

You can apply Personal Loan from: