Personal Loans: From eligibility, interest rates to the application process; all you want to know about them

Have you ever wondered what is the way out when your demands or desires outstrip your economic potential? For example, you may want to go to a European destination with your partner for a week-long trip, but do not have the adequate money in your bank, or want to add a small extension to your new apartment but have recently run out of the money.

In such a situation, would you prefer to call a friend for help or borrow it from your dad or use your credit card? Wait!

We are talking about a large amount, say ₹5-10 lakh. You should not rely on your friends or family, and a loan on your credit card would have to be returned within 45 days. Is not there a better way out then?

Well, you could apply for a personal loan from a bank.

Yes, the bank offers you a loan for all such needs—the needs which are salient to you but perhaps not too significant for the bank to be treated as a separate category such as a ‘home loan’ or ‘car loan‘.

Let us suppose, Ajay wants to buy a decent expensive watch for his wife on her birthday which is due two weeks from now. He can’t afford to save money for the next six months in order to buy it, nor does the bank give a loan specifically for “wife’s birthday gift”.

Likewise, if you want to go on a trip to Singapore with friends while your savings were spent on your new house last month itself. Do you want to miss out on this trip with friends?

For all such unpredictable needs that are too personal to be revealed – you can raise money from a bank via personal loan.

Interest rates: Since personal loan is an unsecured loan, interest rates charged by banks on them are on a higher side. They start in the range of 10.5-11 percent and can go up to 20-25 percent per annum.

Eligibility criteria: Although it varies from bank to bank, personal loan is usually offered to the applicants whose monthly salary is above the minimum threshold of say ₹20,000 or 25,000 per month. The credit score should also be in a positive range of say above 720.

It can be offered both to salaried persons and self-employed.

Documents you require?

The documents which the banks usually ask for include the past three months’ salary slips, address proof such as the bank statement or electricity bill, and identity documents such as aadhaar and voter ID.

Process to apply for personal loan:

In order to apply for personal loan with a bank, one has to take the following steps:

A. Go to the bank’s website, and look for the option ‘apply for loan’.

B. Here, you choose the category ‘personal loan’ among different options given.

C. The bank will first ask you to share your phone number, send the OTP for verification and check your credit score.

D. The financial institution will then ask you for your financial statements and KYC documents such as aadhaar, bank statements, PAN, salary slips and form 16.

E. Initially, the bank will give an initial approval based on what you had applied for.

F. Once this is done, the bank’s credit department will run through your profile, and ask you to show more documents such as the employment contract or income tax returns (ITRs), among others.

G. Finally, once your case is approved, the bank will approve the personal loan which is either dispersed or get it done via net banking.

Is this advisable to take personal loan?

Theoretically speaking, there is nothing wrong in raising a personal loan which is unsecured in nature. Any loan that is offered at an unaffordable rate of interest, say 10-12 percent can be serviced easily so long as it is unavoidable and taken from a credible borrower.

“It is important to consider taking out a personal loan for non-essential things like vacations or luxury purchases, especially due to the high interest rates. You need to think about how the loan will affect your finances and have a solid plan in place for repaying it. Many young professionals find themselves in debt because they overlook these factors, so it’s essential to be extra cautious when opting for a loan,” says Samir Shah, Head, Online Business, Axis Securities.

“We are in the era of easy loans and instant gratification. Gen Z and millennials believe more in living in the present than in securing the future. Because of loan lending apps, going to an exotic location on vacation or to buy the latest iPhone is just a cakewalk. But we need to understand whether such easy access to credit pushes us into a debt trap,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.

Where can you get a personal loan from?

There are multiple options for borrowers to take personal loans from. These include banks, non-banking financial corporations (NBFCs) and fintech platforms.

When to go to a bank for a personal loan?

When you need the money, the safest and most credible lending institution is the bank. So, you can apply for a personal loan with any bank such as State Bank of India, HDFC Bank, ICICI Bank, Punjab National Bank, among others.

Not only the interest rates of banks are lower but they are also trustworthy as well as safe.

When the bank rejects your loan application?

The problem arises when the bank happens to reject your loan. There are only two options in this scenario: approach an NBFC or a fintech institution. There are a number of NBFC or fintech institutions from where you can procure a personal loan.

“It’s important to note that whenever a loan gets rejected, it takes a hit on the credit score negatively. A poor credit score directly affects the borrower’s borrowing capacity and also leads to a higher interest rate. Unless the expense is extremely important, the individual should resist taking the personal loans from NBFCs/ fintech apps. While taking loans from NBFC and fintech apps, it’s important to be mindful about the processing fees because they are quite steep,” said Priyank Shah, Co-Founder & CEO of The Financialist.

Should you approach an NBFC for a personal loan?

Approaching an NBFC is typically a compulsion and not a choice. Borrowers tend to approach an NBFC only and only when the bank has turned down your loan.

“Explore all available options before considering a loan from an NBFC or fintech company, as their interest rates can be higher. It is crucial to make a well-informed decision based on your financial situation and future goals,” says Samir Shah, Head, Online Business, Axis Securities.

Are these fintech apps safe?

Borrowing from a fintech app should ideally be the last resort for anyone, be it for personal loan or any other loan.

Recently, banking regulator Reserve Bank of India (RBI) issued self-regulatory organisations (SROs) framework for the fintech sector.

In the span of two years ending August 2023, Google banned 4,700 illegal loan apps from Play Store. In fiscal 2023, there were 1,062 complaints against such lending apps, data shared by the Finance ministry in Lok Sabha in July last year.

This calls for borrowers to be extra cautious before relying on a fintech app to raise a personal loan.