A personal loan is a type of loan which is given against your salary, pension or fixed deposit. Personal loan against salaries or pension are normally unsecured kind of loan in which bank lend to their customers based on salaries.
Personal laon against fixed deposited is a secured loan which bank mark 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, either you have to have a salary credit in your account. Be it a private sector or government organisation employee. You may be a pensioner or you should have a fixed deposit.
The fact is, if you are not having these, you might end up not getting a personal loan. Although, banks offer personal loan to non salaried person but he should have one of the following investments
- PPF- Public Provident Fund.
- Life insurance policies.
- Mutual funds.
- National Savings certificates.
- Shares and debentures.
Let’s talk about personal loan for salaried person.
For a person who is getting a salary credited in his account might need to know the basics of how to apply a personal loan.
Even before visiting bank, if you have a clear ideas on which you are about to commit, it would add better understanding about product and it would simplify your decision.
Whether you go ahead and seal the deal or you decline. It would help you decide better.
How to apply a personal loan?
There are certain things you need to see whether you will be eligible or not. This is important because after putting in so much of effort, if your proposal gets rejected at the end, it would be a complete wastage of your precious time and money.
Watch out the eligibility criteria!
- Check your CIBIL score. It should be more than 650. The better CIBIL score you have, the better deal you get.
- Confirm there is no bad debt remarks in you CIBIL report. Even for a rupee write off record should not be there, bank may reject your proposal.
- Salaries credited in your account is as per banks norm. For State Bank of India, a person has to have a minimum of ₹ 15000 as a net salary income. Net salary is Gross Income minus deductions which is credited the bank account.
- There should not be non credit of salary in your account. If a month is missed out, there should be a valid reason for that.
Eligible! now what?
If you got through the eligibilty criteria, that means you have a high chance of getting a personal loan.
Next thing you need is to prepare some documents which is required for processing of loan. These documents are as under:
- Latest salary slips. Bank usually ask for last 3 to 6 months salary slips.
- Form 16 or Income tax return.
- Having PAN card is a must.
- Office ID card.
- Proper KYC as per RBI guidelines. ID may be Adhaar card, Voter card, Driver’s licence, Passport. Your current address should be updated in your ID or else your HR may issue a service certificate.
- Drawing and disbursing authority’s signature on annexure. Some bank discount interest rate if DDO sign legal paper. Bank call these as check off facility. Though it is not mandatory in most of the bank.
- A judicial stamp paper of required amount as per your jurisdiction. To know the amount, you may approach your bank.
Now the hard part is done. All you need is to meet the bank official. You have got two options. You may go online and submit all your paper or you may go visit the bank and let them do it for you.
Banks has provided the process to apply online, with or without internet banking. Having internet banking might gives you better deals. As you are already an existing customer who is using bank’s net banking, you might get better offers too.
If in case, you opt to do manually, seek advise from the concern official. Ask him about the terms and conditions of the loan agreement.
Things you need to aware of!
While applying a personal loan, there are certain basics you need to know before sealing the agreement. These are mentioned below
- Prevailing rate of interest.
- Tenor of loan.
- Pre payment 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 for a personal loan. If you are earning a monthly salary of say ₹ 20000. Bank normally gives you 20 to 25 times of your net monthly income.
Your eligible amount will be ₹ 480000 if we consider at 24 times of NMI. You will be eligible for the said amount as long as your EMI/NMI ratio is below 50 percent.
EMI/NMI ratio is the value that determine your exact eligible amount.
For example, let’s say if the rate of interest is 12 percent, for ₹ 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, bank would lower your eligible amount to compensate the EMI/NMI ratio and gives you the loan slightly lower than the initial eligible amount.
Some bank fixed the EMI/NMI ratio at 50. You may also find few other banks which has higher EMI/NMI ratio as it is decided by the concern bank management. It may go beyond even 70 percent.
After eligible amount is arrived, which is ₹ 449550 at 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 sanctioned amount. Then, an amount of ₹ 4495.5 will be deducted form the sanctioned amount. That leaves to ₹ 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 decease your entire amount upto ₹ 425054.5
How to safe the interest that you pay on loans?
Yes, this is the fact that almost all of us do not give a thought. We often do not care at all, but the interest that you pay impact hugely on your financial matter. As there is a saying that, a small drop of water can make an ocean.
In the above example, with that loan of ₹ 449550 you are going to pay ₹ 150450 as an interest toward the total outstanding in a span of 5 years. It’s not a joke, you know! So, how do we safe this amount?
Lets see what options do we have!
SIP (Systematic Investment Plan) is a great choice. In fact, there are a number of funds which can yield attractive returns in 5 years. It can go even ₹ 150000 mark quite easily.
With a 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 small as ₹ 2000 of monthly SIP in mutual fund.
SIPs of SBI mutual fund, Axis, HDFC and ICICI mutual funds are worth enrolling it.
Another alternative is that, when your bank request you for loan insurance. See for an insurance product which gives you returns along with covering the risk of sanctioned loan amount. Life insurance is one option which you can rely on.
It will cover your life as well as the loan. For the said loan, to cover ₹ 450000 you may required a life insurance policy with ₹ 45000 annual premium.
Tenor of life insurance may be longer but it is worthwhile enrolling it. In case of your death, bank will recover the due amount from the insurance company.
Monetary benifit from your department will be left un touch and your family would lead a better life.
Opening a fixed deposit does not sound good, you can do if you have surplus fund. It can generate that amount of 150000 but the investment amount would be high. But, basically it does not make any sense. If you have the fund, why loan?