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.

The process of applying for a personal loan is much more straightforward than that of getting a housing loan requires less documentation and faster approvals. The most common documents banks or finance companies need you to submit are proof of residence, identity, Form 16, bank statements and your latest salary slip. These of course may not be standard across all finance companies offering personal loans and some may require you to submit a few additional documents for verification.

Once you have submitted your documents, verification and processing may take upto a week. And public sector banks such as State Bank of India or Bank of Baroda may also ask for a guarantor even if they don’t ask for any collateral. They may require you to provide a guarantor even if you are an existing customer with an excellent track record. Production of all necessary documents is essential for a quick approval of your loan as your funds will not be released till the bank has verified all the information you submitted at the time of approval.

The most common documents you will be asked to submit when applying for a personal loan other than a passport size photograph are:

Proof of identity

Documents that can provide a proof of identity when applying for your personal loan may include a copy of your passport, driving licence, voter ID, PAN card, a credit card with photograph or employee identity card which are as an identity proof and signature proof. Very often employee identity cards are accepted only in the case of government employees or staff of government owned undertakings. Some banks may also refuse to accept driving licence as a valif proof of identity.

Residence proof

Banks offering personal loans will accept a copy of your passport, ration card, voter ID, or LIC policy as a residence proof. In case your present address is different from that given in these documents you can produce a telephone bill, electricity or water bill as your proof of residence. Some banks insist on proof of residing at least one year at the present address as they want to make sure that you reside within the city limits.

Proof of income

Documents you are required to submit as proof of income differ depending on whether you are salaried or self-employed.
If you are salaried banks will require you to submit your:

• Latest salary slip
• Form 16 for the last financial year
• bank statement for the last 6 months

There are banks, which seek bank statement for only three months. Professionals and government employees may be required to submit a proof of highest qualification for which a copy of your degree certificates are required.

Self-employed applicants will have to submit

• IT returns for the last 2 years
• balance sheet and profit and loss account
• proof of office lease such as utility bill, municipal tax receipt or title deed

Some banks will ask for proof of turnover (latest sales / service tax returns) and a proof of continuity in current profession which can be IT returns or certificate of business continuity issued by the bank.

Personal loan is an any-purpose loan, which is given by financial institutions normally without any kind of security or collateral unlike a housing loan. It meets a customer’s urgent need for cash and the lender is not bothered about the purpose of the loan. It can be for anything - a professional college admission, daughter’s marriage, home furnishing, medical treatment or even a holiday abroad.

Such a loan is usually available for a five-year period. Although the interest rates on personal loans may be higher than other types of loans, the advantage is that it requires less paper work and is often sanctioned in as little as 72 hours. For this very reason you must always do your homework on interest rates and negotiate offers from multiple banks to get a deal that offers you finance at the best rates.

Eligibility

Although the promotions from banks may often mislead loan seekers into believing that personal loans have no eligibility criteria, the reality is not as simple. When you are seeking a loan, keep in mind that a personal loan is in essence an unsecured loan. These being the case banks scrutinize every application to make sure you have the ability to repay this loan. This is done by verifying an applicant’s financial profile and credit rating which fit in two broad categories:

• Salaried persons between the ages of 21 and 60
• Self-employed individuals between 25 and 65

Various lending institutions may have different eligibility norms and hence the loan amount and interest rate they offer you may differ based on these criteria. For example, at the time of writing ICICI Bank requires a net monthly salary income of Rs 8,000 whereas for HDFC Bank it is Rs 7,000. SBI and Nationalised banks have different eligibility levels for customers in metros, urban and non-urban centres. The loan amount also you are offered will also differ from bank to bank as the personal loan limit depends on the borrower’s income, repayment capacity and credit rating.

For a personal loan the minimum amount sanctioned is usually around Rs.24,000 in metro and urban centres and Rs.10,000- in rural/semi-urban centres. The maximum can be 12 times net monthly income for salaried persons subject to a ceiling of around Rs.15 lakhs, but again this may vary depending on various factors. Some foreign banks like Standard Chartered and Citibank have higher limits. Most banks also maintain detailed lists of approved companies and organizations whose employees will find it easier to get a personal loan. Most public sector banks insist on a guarantor for personal loan even for existing account holders.

Documentation required is for a personal loan is usually very basic but production of all relevant documents is essential for fast approval of the loan. The following are the most important documents you must keep handy when applying for a personal loan.

• Identity proof: A copy of passport or driving licence or voter ID or PAN card or employee identity card as identity proof and signature proof.
• Residence proof: A copy of passport, ration card, telephone bill, voter ID, or LIC policy.
• Proof of income: Latest salary slip and Form 16 for the last year and bank statement for the last 6 months. IT returns for the last 2 years with balance sheet and profit and loss account as a proof of income for self-employed.

A summary of charges

When seeking a personal loan a key factor in selecting a lender would be the rate of interest and these rates may differ based on your profile. If you are employed with a reputed organization earning in a higher income bracket, residing in an upmarket area and have a good credit record you have a better chance of negotiating a lower rate. If you have a stable financial profile there is always scope for getting a better rate which can be anywhere between 12 and 30 percent per annum.

You may also incur other charges when taking a personal loan like processing fee, documentation fee, pre-payment penalties and switching charges which will add to the cost of the loan. . Some banks also charge a few administrative costs such as charges for duplicate statement, charges for rescheduling and service charges of up to 3% of the loan amount. So be very clear with the bank about disclosing their charges levied as on taking a closer look at these their claim on lower interest rates may not be as inviting as it sounds and can even be misleading.

Disbursal

Once a personal loan is approved disbursal is fast with the bank giving you a sanction letter followed by the loan disbursal either by cheque or demand draft. Some private banks and foreign banks that use direct selling agents to process the loan application faster and disburse the loan within three working days. Public sector banks may take slightly longer.

Tenure Repayment

You repay a personal loan through equated monthly installments (EMIs). The tenure ranges from 12 months to 60 months. Shorter the tenure heavier will be the EMI. You can make the repayment through post-dated cheques or through ECS. You also have the option to prepay the loan but it can be costly as many banks charge up to 5 percent of the outstanding amount as penalty. You can also transfer your loan to another bank which charges a lower interest after assessing the cost of transfer.