A personal loan is a type of loan that is given against your salary, pension, or fixed deposit. Personal loans against salaries or pensions are normally unsecured kinds of loans that banks lend to their customers based on salaries.
A personal loan against a fixed deposit is a secured loan in which the bank places a lien on your FD as collateral security.
When your loan is repaid, you will get back the FD with accrued interest.
Now we know that if you are looking for a personal loan, you have to have a salary credit in your account. Be it a private sector or government organization employee. You may be a pensioner, or you should have a fixed deposit.
The fact is, if you do not have these, you might end up not getting a personal loan. Although banks offer personal loans to non-salaried people with one of the following investments:
- PPF: Public Provident Fund
- Fixed Deposits and Recurring Deposits.
- Gold ornaments
- Life insurance policies
- Mutual funds.
- National Savings Certificates
- Shares and debentures.
- Bonds.
Let’s talk about personal loans for salaried person.
A person who is getting a salary credited to his account can apply for a personal loan at any nationalized or private bank.
Having a clear idea of what you’re about to commit to before visiting the bank can simplify your decision-making process and improve your understanding of the product.
Whether you go ahead and seal the deal or you decline. It would help you decide much better.
How to apply for a personal loan?
There are certain things you must understand to determine whether you will be eligible or not. This will help you avoid an application rejection by the bank.
Watch out for the eligibility criteria.
- Check your CIBIL score. It should be more than 650. The better the CIBIL score you have, the better deal you get.
- Confirm that there are no bad debt remarks in your CIBIL report. Even if a rupee write-off record should not be there, the bank may reject your loan request.
- Salaries credited to your account are as per the bank’s norm. For the State Bank of India, a person has to have a minimum of ₹15000 as a net salary income. The net salary is the take-home pay that you get in your bank account.
- Net salary equals Gross Income minus deductions, which are credited to the bank account.
- There should not be a non-credit of salary in your account. If a month is missed, there should be a valid reason for that.
When You Know You’re Eligible, What Next?
If you meet the eligibility criteria, that means you have a high chance of getting a personal loan.
The next thing you need to do is prepare the required documents, which are required for loan processing. These documents are listed below:
| Required Documents | How You Need to Prepare |
|---|---|
| 1. Salary Slips and Bank Statements | The bank usually asks for the last 3 to 6 months salary slips. |
| 2. Form-16 or Income Tax Returns (ITR) | Latest ITR or Form-16 |
| 3. PAN Card | Xerox copy |
| 4. Office ID Card. | Xerox copy |
| 5. KYC Documents | Aadhaar card, Driver’s licence, Voter card, Passport |
| 6. Non-Judicial Stamp Paper | The stamp value depends on your area of jurisdiction |
Compiled all?
Now the hard part is done. All you need to do is meet the bank official. You have two options. You may go online and submit all your papers, or you may go to the bank and let them do it for you.
Banks have provided the process for applying online, with or without internet banking. Internet banking might give you better deals. As you are already an existing customer who is using the bank’s net banking, you might get better offers too.
In case, you opt to do it manually, seek advice from the concerned official. Ask him about the terms and conditions of the loan agreement.
Things you need to be Aware of
While applying for a personal loan, there are certain basics you need to know before sealing the agreement. These are mentioned below
- Prevailing rate of interest.
- The tenor of the loan.
- Prepayment penalties.
- Penalty on EMI failure.
- Is insurance required?
- How much is the processing fee?
- Is there any hidden charge, such as service tax?
Here is an example of a personal loan. If you are earning a monthly salary of, say, ₹20000. The bank normally gives you 20 to 25 times your net monthly income.
Your eligible amount will be ₹ 480000 if we consider 24 times NMI. You will be eligible for the said amount as long as your EMI/NMI ratio is below 50 percent.
The EMI/NMI ratio is the value that determines your exact eligible amount.
For example, if the rate of interest is 12 percent, for a loan of ₹ 480000, the EMI for 60 months would be ₹ 10677. Your EMI/NMI ratio would be 53 percent. Which is 3 percent above bank lending terms and conditions.
So, the bank would lower your eligible amount to compensate for the EMI/NMI ratio and give you a loan slightly lower than the initial eligible amount.
Some banks fixed the EMI/NMI ratio at 50. You may also find a few other banks that have a higher EMI/NMI ratio, as it is decided by the concerned bank management. It may go beyond even 70 percent.
After the eligible amount has arrived, which is ₹ 449550 at an exact EMI/NMI ratio of 50 percent, how much are you going to get in hand?
Let’s say a processing fee of 1 percent of the sanctioned amount. Then, an amount of ₹ 4495.5 will be deducted from the sanctioned amount. That leaves ₹ 445054.5, which you are going to get provided you have not done any insurance on the loan account.
If you do, roughly another ₹ 10000 to ₹ 20000 might get deducted, which further decreases your entire amount up to ₹ 425054.5
How to save the interest that you pay on loans?
Yes, this is the fact that almost all of us do not give it a thought. We often do not care at all, but the interest that you pay has a huge impact on your personal finances.
In the above example, with that loan of ₹ 449550, you are going to pay ₹ 150450 as interest toward the total outstanding in a span of 5 years. It’s not a joke, you know! So, how do we save this amount?
Let’s see what options we have!
SIP (Systematic Investment Plan) is a great choice. In fact, there are a number of funds that can yield attractive returns in 5 years. It can go even ₹150000 mark quite easily.
With the right financial assistance and a little bit of risk, there is a huge potential that you may easily earn and surpass that amount of ₹ 150000 with as little as ₹ 2000 of monthly SIP in mutual funds.
SIPs of SBI, Axis, HDFC, and ICICI mutual funds are worth enrolling in.
Another alternative is when your bank requests loan insurance. Seek out an insurance product that gives you returns along with covering the risk of the sanctioned loan amount. Life insurance is one option on which you can rely.
It will cover your life as well as the loan. For the said loan, to cover ₹450000, you may require a life insurance policy with ₹45000 annual premium.
The term of life insurance may be longer, but it is worthwhile enrolling in it. In the event of your death, the bank will recover the due amount from the insurance company.
Monetary benefits from your department will be left untouched, and your family will lead a better life.
Opening a fixed deposit does not sound good, but you can do it if you have surplus funds. It can generate that amount of ₹150,000, but the investment amount would be high. But, basically, it does not make any sense. If you have the funds, why loan?