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G. Madhan

WONDERING how to fund a wedding in the family, or renovate your old house or get your daughter admitted in college? Think no more! Head straight for a personal loan.

Personal loans are one of the most preferred options for financing short-term needs or unforeseen expense.

The consumer prefers it because of the degree of flexibility it offers, as they are available at attractive interest rates and repayment periods. There is also no need to offer a collateral security or have guarantors.

Personal loans are generally processed quickly with simple procedures and documentation. However, the processing speed often depends on the relationship the borrower has with the bank or financial institution. The size of the loan is either linked to the salary or the income earned by the borrower.

Looking from the lenders' point of view, the retail credit scenario at present has become highly competitive as it is filled with many public/private sector and multinational banks, and finance companies.

The coverage of personal loans is in in two parts. The first part will contain the eligibility criteria, quantum of loan that can be availed, interest rates, pay back tenor and the paper work involved. The second part will explain the finer points that an individual should consider while taking a personal loan.

If you want to take a personal loan for furnishing your residence. The following are the questions you need to ask before getting it: Am I eligible to get a personal loan? If yes, how much?

The eligibility criteria

Most banks have eligibility criteria such as age limit, minimum educational qualification, post qualification experience, number of years in the current company/residence and minimum net/gross annual income. For instance, ICICI Bank expects the loan recipient to be between 25 and 58 years of age, while for IDBI bank the maximum age-limit is 55 years, even if the retirement age of the recipient is 58. Generally, for self-employed professionals and businessmen, it is relaxed up to 65 years.

The quantum of loan

Personal loans are generally offered up to Rs 10 lakh, starting from Rs 20,000 (see table for details). However, this depends on the income and repayment capacity. Some banks offer personal loans based on gross/net income, while others do it on disposable income. Some banks and institutions also allow clubbing of the incomes of spouses if a higher loan amount is desired.

Interest rates

At present, most banks offer personal loans at 17 to 21 per cent. Interest rates within a bank may also vary based on the type of relationship the loan recipient has with the bank. For instance, if the loan recipient is a salary account holder in a particular bank, he is usually charged a much lower rate. Similarly, the interest rates are different for non-salary account holders and non-account holders.

Payback period

Generally, for most banks, the payback period for the principal along with the interests is between 12 and 48 months in equated monthly instalments (EMI). Some banks extend the payback time to 70 months.

Documentation

Almost all banks and financial institutions offering personal loans require a range of documents for processing the loan. Once again, the extent of documentation may vary depending on your relationship with the institution. Usually, a salary account holder is given priority.

The degree of documentation will be less if you have a credit card from the bank, or some other form of credit history with the bank/finance company.

The documents required usually include proof of identity, bona fide of residence, continuance of current job or profession, proof of income and post-dated cheques for the EMI.

Documents supporting proof of identity include a copy of your driving licence, valid passport, voter's or employer's identity card, ration card, telephone bill, electricity bill, income-tax PAN card, credit card, and so on.

Most of these documents can double for proof of residence. Credit card statements, property-lease agreements, LIC policy receipts, letters from employer — if you live in company-provided accommodation — and so on also serve as proof of residence.

For proof of income, usually, the recipient is asked to provide income documents, including the latest salary slip or a salary certificate along with the latest Form 16. Some lenders also ask for the latest bank statement or passbook (where salary or income is credited).

If you have a business, proof-of-income documents might include six months' bank statement, last two years' I-T returns, certified P&L and balance-sheet, and proof of continuity of business.

Proof of office documents could include a utility bill, Shops and Establishment Certificate, lease deed, sales tax certificate, excise duty certificate or a copy of highest professional degree received.

(To be continued)

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