Personal Loan: 18 FAQs – Process, Interest Rates, Charges, Closure

Personal loan is the most attractive option to meet financial emergency or need. And there are many lenders providing the same in India, as the profit earned is high for them. Although it sounds simple to get a loan, however there are many commonly asked queries by readers of this blog. Listed below are the FAQs and simplified answers to each.

1. Is personal loan easy to get in India?

There is no definite answer to this. If CIBIL score is good and income meets eligibility criteria of the lender, then chances of approval are high. But on the other hand, if the score is poor, you can still get loan, provided you meet other criteria. You can also get loan against securities, as mentioned in this article below.

2. Can I take personal loan for any purpose?

Personal loan has now become too personal. Individuals are using the money for almost every purpose such as buying gadgets, electronic appliances, wedding expenses, credit card bill payment, short term financial crunch, home renovation, business expansion, etc. While taking personal loan, you do not have to specify the reasons, so it’s your money and can be used for anything.

3. What is the process of getting the loan?

It is very standard in almost every bank. It is a five step process as follows:

  1. Apply for loan
  2. Submit complete verification documents
  3. Application review and other formalities by the banks. It may also include visit to your address by the bank’s investigative agency.
  4. Loan application status – approved or rejection is communicated by the bank
  5. Loan amount disbursal

4. Who offers personal loan in India?

There are seven broad categories of entities who offer financing:

  1. Public sector banks such as SBI, IDBI and others
  2. Private banks such as ICICI, Axis, HDFC and others
  3. Foreign banks such as HSBC, Bank of America, Citi Bank, American Express
  4. Co-operative banks
  5. Finance companies such as Bajaj Finance, Aditya Birla Finance, Tata Capital and others
  6. Peer to peer lending companies
  7. Private money lenders

5. How is the loan amount disbursed?

There are three options which varies for each bank – cheque, demand draft and direct bank transfer.

6. Why interest rates are high in case of personal loan?

This is because of the risk involved. Personal loan is an unsecured loan, i.e. banks do not ask for any collateral before lending money. So the risk factor is very high for the banks due to possibility of default or non-payment of dues, affecting their profits. So to lower the risk, higher interest is charged.

7. Why income is considered to be a deciding factor by the banks?

Income is the only proof based on which lenders evaluate the repayment capacity of the applicant and also calculate the loan amount. But this does not mean, low income earner cannot get loan. Check out personal loan for low income earners.

8. Can this loan be taken against any security?

Yes, you can take personal loan against securities such as property, car, gold, LIC policy, fixed deposit, shares, mutual fund and bike. This is helpful, even if CIBIL score is bad.

9. If loan is rejected, can I apply again with the same or other financial institution?

You should first understand the reason for rejection and then take further action. E.g. if the loan got rejected due to poor CIBIL rating, then your first objective should be to improve the score. Even if you apply for loan at some different lender, chances of rejection will remain as it is. Other alternate solution is to get loan from peer to peer marketplaces or co-operative banks.

10. When to prefer taking loan from co-operative bank?

Interest rate by co-operative bank is low compared to commercial banks. However there is a limit to the loan amount and you need to be a member of the bank, to avail loan. So if the fund required is less and you are a low income earner, then prefer co-operative bank. Read more about this.

11. Are there pre-closure and processing charges?

Yes, many banks charge these two fees.

12. What factors banks take into consideration while deciding on the loan amount?

The main eligibility criteria are – CIBIL score, income, age, profession (salaried or self earning), company you work for, qualification, work experience.

13. What are the two types of interest rates applied on personal loan and their pros and cons?

Fixed and floating/variable are the two types of interest rates applied by the bank. And each having its own advantages and disadvantages as mentioned below.

Pros and cons:

There is no change of interest in case of fixed. And till the time loan is fully repaid, the interest remain as it is. So budget planning becomes very easy. Opposite is the case with variable interest; the rates can change anytime and is dependent on market condition. So EMI can change multiple times and may go above or below the fixed interest.

14. Before applying for a loan, is there any planning required?

Yes, planning is must in any money related matter. You should consider following points before opting for personal loan:

  1. Evaluate your loan amount requirement
  2. Check your CIBIL score
  3. Compare product features offered by multiple lenders. Especially compare interest rate, prepayment and processing fees.
  4. Select the option which best suits your requirement.
  5. Ask lender about the post loan closure formalities and process.

15. If loan is rejected, does it affect CIBIL score?

Yes. And banks communicate the status to CIBIL. This is the reason you should do planning, as mentioned above. Get to know about personal loan for low CIBIL score.

16. Which is better – loan with low or high interest?

It depends on how much money you will end up saving on the EMI. Usually high interest is applied when tenure is short and vice-versa.

17. Once loan account is closed, what formalities should be done?

The most important thing to do when repayment is fully done, is to get loan closure letter from the bank. This is the only proof which states that you do not owe anything to the bank. Many people think that once the dues are fully paid, the obligation of the borrower ends. But legally, no due certificate or closure letter is the only document helpful in any future dispute with the bank or any incorrect information is present in the CIBIL record or when new loan is applied in the future. Once everything is successfully done, check your CIBIL score to confirm whether loan is marked is closed by the lender or not and that there is no due amount in the record.

18. How to pay EMI i.e. which payment mode?

There are multiple options available mainly – cash deposit in bank or ATM, cheque, demand draft, direct debit, online transfer, app.

If you have any more questions related to personal loan, then please mention in the comment section below. It will be answered as early as possible.

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