LoanRaja Blog- Personal Finance Guide

Lenders are often wary of lending to someone who is self-employed, particularly if they are new to it and cannot provide proof of steady income. Personal loans can help a self-employed person to exploit the opportunities even when required finances are not available. In today’s highly competitive personal loan market, banks and financial institutions now encourage self-employed individuals to avail themselves of personal loans. Those eligible are self-employed professionals like doctors, chartered accountants, engineers, MBA consultants, architects, company secretaries. Other self-employed individuals eligible for personal loan are sole proprietors, partners and directors engaged in the business of manufacturing, trading or services.

No uniformity

Generally lenders are more stringent on determining the eligibility and income criteria of a first time self-employed loan seeker. Sales agents will be doing a thorough background check verify the customer’s credentials and repayment capacity. The documentation and processing of application also may be different from that of a salaried individual. The cut-off level of income for being eligible for a personal loan and the maximum loan available for self employed professionals is also different from that of salaried applicants. It may be easier for an existing customer of the bank to get a personal loan as creditworthiness in such cases means a lot to the lender. Some banks have different loan schemes available for different professions.

For example, many banks have special schemes for doctors such as Axis Bank which has a scheme for self-employed doctors who have a MBBS or BDS or higher qualification. Self-employed doctors between the ages of 24 and 65 are eligible for a maximum loan amount of Rs.20 lakh. They need a minimum experience of two years in the profession and annual income must be not less than Rs.2.4 lakh. The same bank has a different eligibility criterion for other self-employed professionals. Maximum loan available for other self employed professionals will be Rs.10 lakh with a minimum annual income requirement of Rs.1 Lakh and three years of continuous work experience.

Documents

The documents banks require from self employed loan applicants are also different. Along with a passport size photograph customer has to submit proof of identity, address and professional qualification. Pan card/ passport copy/ ration card/ Voter ID are accepted. If you are self-employed, you will have to produce a certified balance-sheet and profit and loss account of the past two/three years along with other mandatory documents, such as partnership deed. Bank statements for the previous six months also have to be furnished. Proof of continuity of current profession (IT Returns / Certificate of business continuity issued by the bank) and Proof of office (Lease deed / Utility bill / Municipal Tax receipt / title deed) are the other requirements.

Since profits of self -employed people are irregular in nature it will have an impact on the repaying ability of the borrower. This is the reason many self-employed individuals like traders or mechanics approach NBFCs to meet their requirements for urgent cash even though it is costlier. A personal loan from a bank won’t be suited to small traders who need a short term loan for two-three months as banks offer a minimum loan tenure of 12 months. An NBFC on the other hand will meet his demand as the company provides more flexibility in eligibility and repayment terms. NBFCs who often come to the rescue of customers ignored by banks are keen to get new customers and build up a pool of tested clientele.

Comparative rates

Following is an example of how a public sector bank and an NBFC treat the same amount of personal loan with the same tenure. The amount of personal loan is Rs.25,000 with a two-year tenure:

Note: These rates may have changed, please check current rates at the time of applying

SBI Saral Personal Loan:
Interest rate : 14.5%
EMI : Rs.1,206
Processing fee : 1-2%
Prepayment fee : Nil after 6 months
Total interest : Rs.3,950.

Citi Financials Personal Loan::
Interest rate : 22 %
EMI : Rs.1,297
Processing fee : 2%
Prepayment fee : 4%
Total interest : Rs.6,127.