In this episode of Dhan ki Baat, Garima Nahar, General Counsel and Chief Anticorruption Officer at IIFL Finance, discusses why you might need a personal loan and how you can avail it.
Personal loans, like the name suggests, are loans granted for personal need. We all have dreams and aspirations and sometimes need some monetary help to achieve them. Also, life can throw difficulties or we overspend our month allowances and some funds are most needed then to ensure smooth living. For instance, maybe you have decided to go back to college but do not have the funds for it. Or maybe, there is any medical exigency and insurance is not enough to cover medical fees. Whatever be the reason, a personal loan may just be the way for you to solve your financial woes. The good news is that personal loans are often unsecured and fairly easy to get. They give you the flexibility to use the funds as per your convenience and provide the perfect solution to receive instant cash.
Education: You can take a personal loan for academic pursuits for yourself or any family member. The loan taken can be used to pay fees for school or college.
Marriage: To create the dream wedding you've always wanted, meet the expenses of the marriage of yourself or your child through a personal loan.
Home renovation: You can take a personal loan to pay for the expenses incurred while renovating your current home.
Vacation: Yes, you can take a personal loan for going on a vacation. You don’t have to shy away from enjoying a good experience due to lack of funds.
Personal needs: You can take a personal loan to meet your personal expenses like buying a home appliance or an electronic gadget for your personal use.
Consolidating Debt: Some times, a sensible and wise use of a personal loan is paying off other loans that are becoming hard to manage. If you have a large outstanding amount from another loan, or a credit card that are very expensive, then you can use a personal loan for clearing the debt.
While a personal loan can assist you in a big way financially, one must understand the commercial terms of such loan in detail to avoid any last moment surprises
Equated Monthly Installments (EMI): An EMI is a fixed amount inclusive of principal and interest that you pay to the financier every month on a specific date. EMI is an amount that when paid over a number of years, pays off the debt completely (inclusive of interest amount). Clarity of EMI estimate helps in budgeting monthly expenditure. Depending upon your requirements you may also customize your EMIs. Longer the tenure of the loan means smaller the EMI outgo per month. However, in such cases interest expenditure for such a long tenure is also higher. Hence, don’t increase the EMI burden by choosing a very short tenure, and don’t pay excess interest by keeping a very long tenure, either and chose the EMI amount wisely.
The Rate of Interest: An interest rate is the percent of principal charged by the financier for the use of its money.
Term or tenure of loan: The term or tenure of the personal loan refers to the time period or number of years until which you have to repay the loan amount. For example, if the tenure of your loan is 5 years, you will have to repay the loan in the next five years. The EMI increases or decreases based on the tenure of the loan.
Processing fee: It is the amount charged by the financier to the borrower for processing or providing the loan amount.
Pre Payment/Part Payment facility: Please understand the prepayment conditions before procuring the loan. You may pay the whole loan amount with interest before the term or tenure specified in the loan contract or a part of the loan amount. Since this may come with an extra cost, do read the fine print for availing these facilities before paying the whole or a part of the loan amount.
Credit cards are used to fulfill your needs for short-term credit and are convenient for recurring expenses, which you can pay off by the due date, like your monthly expenses or fixed utility bills. But they are only a short-term credit tool, the tenure for which is a couple of months. However, it is not suited to many large, ad-hoc expenses like marriage or surgery. If the credit card bills are not paid within the grace period provided, the financing charge are usually very high compared to personal loans.
The interest, in case of personal loans, are calculated on the reducing balance and not on the flat amount which is the case with credit cards. Tenure of the personal loan can be customized up till 5 years whereas credit card dues are forthwith payable upon expiry of grace period.
The requirement of documentation for obtaining a personal loan is straightforward and quick. You just need the following documents to receive a personal loan within 8 hours:
Know Your Customer (KYC) documents: These documents include your PAN card, voter identification, Aadhaar card, driving license, utility bills, etc.
3-6 months’ bank statements: To understand your ability to repay the loan.
3 months’ salary slips: You are required to present three months’ salary slips verifying your monthly salary and paying capacity.
Employer ID copy: the employer detail also helps in credit analysis process.
All it takes are these five steps to get an instant personal loan online:
Step 1: Apply Online
Step 2: Online approval
Step 3: Document upload
Step 4: NACH (National Automated Clearing House) and E-Sign
Step 5: Disbursal of loan amount
All these steps (in the online application) may be completed within 8 hours if you have complete paperwork.
Ms. Garima Nahar was the General Counsel and Chief Anticorruption Officer at IIFL Finance and was instrumental in setting up the legal team focusing on NBFC business and strategy. She started working with the group since 2015. She is a legal professional having over 14 years of divergent experience in various banking and financial transactions. She is also a gold medallist, and holds a B.A.LL.B (Hons.) degree from National Law Institute University, Bhopal. She has worked with ICICI Bank and Davis Polk & Wardwell LLP at New York where she extensively worked and focused on capital markets, treasury, derivatives, structured financial products and regulatory practice.
A personal loan is a credit taken to fulfill instant cash needs for a one-off expenditure that must be repaid within a short period to the lender. You do not need to pledge a collateral or a security in exchange of the loan.
Personal loans have many, flexible purposes. You can take a personal loan to cover the expenses of education, marriage, home renovation, vacations or any other personal needs like buying a home appliance, gadget, etc.
Equated Monthly Installment (EMI) is a fixed amount specified in the loan contract that must be paid every month on a specific date. It is paid over a number of years until the loan amount is paid off. The EMI includes a part of principal amount as well as interest.
Personal loans have a tenure of 1 to 5 years. In some cases, a longer or a shorter term for a personal loan may be allowed by a borrower. You can repay your loan by paying monthly EMIs via post-dated cheques. You can also avail the option to prepay the whole loan amount or a part of the loan before the tenure of the loan contract if your creditor gives the facility.
The rate of interest on credit cards is usually higher when compared to a personal loan. You can opt for a longer tenure in a personal loan, while credit cards need to be settled within a month or two. Moreover, credit cards are a solution to regular expenses and cannot be used to finance big life events. Hence, personal loans are more suited to large, one-off expenses.
The documentation for personal loans is very simple and straightforward. You only need to submit the requisite KYC documents, 3-6 months’ bank account statements, a copy of your employer ID and salary slips from the last 3 months.
You can apply for a personal loan both online and offline. However, the online process is much faster than the offline process. You get real-time loan approval within a day,and not having to sign and deliver any physical documents makes the process hassle- free. The verification process is simpler too as it is done via e-mail or mobile OTP.
While the banks’ process includes many complicated steps, taking a personal loan from an NBFC is just a five-step process:
Online approval of your application
NACH and E-Sign
Disbursal of loan amount
If the personal loan is taken from an NBFC, the entire process of the procuring the loan, including the credit of funds in your bank account - can be completed within one day.
If you have a regular source of income, irrespective of being a salaried, self-employed or a professional, you are eligible to take a personal loan. The company in which you work, your credit history, your residential location and the need for which you are taking a loan also affects your eligibility as per the lender’s criteria.