LoanRaja Blog- Personal Finance Guide

Who doesn’t dream of owning a house? The middle class families are better positioned now than ever before to realize their dreams thanks to the mushrooming of housing finance companies and a liberalized loan regime. The long process of applying for a loan beginning with the property selection and bank selection is an arduous one. But runaway inflation and rising property prices have now landed the prospective borrowers in a fix. To make matters worse the interest rates on home loans are on an upswing. How does one choose a home loan most favourable to him?

Customers need to pay more attention to the property they are planning to buy and collect all relevant information on it. Before availing oneself of a housing loan the borrower has to make a long-term financial planning as the loan tenure may stretch 10-25 years.
All financial requirements including daily expenses, cost of education and wedding etc. in the short-term and long-term must be identified. Then make a realistic assessment on the surplus you can spare every month on loan repayment. Go only for a home loan from a lender with a good reputation. By approaching two or three banks or housing finance companies it can be ascertained who offers loan with the cheapest interest rate. Explore various fees and penalties that the lender charges.

Eligibility

Three vital factors decide the loan amount sanctioned by banks – borrower’s income, repayment history and the cost of the property. Banks lend up to 3.5-4 times the annual gross income as a home loan. Repayment capacity will be considered after assessing your income, age, qualifications, work experience, number of dependents, spouse’s income, stability of income and employment, assets, liabilities, etc. Larger the repayment capability, the higher will be the loan eligibility.

Documents

The borrower must submit the following documents along with loan application:

• Proof of age
• Proof of identity and residence - passport, PAN card, ration card, voter ID card etc
• Salary slip of last three months along with salary certificate.
• Proof of continuity in job for last two years or Form 16.
• Bank statement for last six months.
• Company profile for employees of a private limited company.
• Proof of business address in respect of businessmen/ industrialists
• Khata certificate.
• Latest property tax paid receipt.
• EC for last 13 years.
• Parent documents and all linked documents for 13 years.
• Sanctioned plan.
• Receipts towards payments already made.
• Sale agreement and title documents in favour of the seller (pre-owned home).
• Sale agreement or construction agreement with builder (new home).
• Total cost break-up on builder’s letterhead (new flat).

Charges

Banks charge 0.5% to 2% of the loan amount as processing and administrative fees, they may in some cases also charge a commitment fee. You need to pay this charge to the housing finance companies if the sanctioned loan amount is not availed of within a certain span of time. In case one wants to switch over from a floating rate to fixed rate or vice versa the borrower is also assessed a penalty. Such a penalty may also be levied in case the loan is repaid before the agreed term, which is 2-3 percent of the outstanding amount of loan.

Disbursal

The lender will disburse the loan only after the borrower puts in his share which is normally about 10-15 per cent of the total estimate. Most banks disburse the loan in stages after ascertaining the progress of construction in the case of new houses or flats. In the case of ready-built houses the bank will disburse the entire amount of the home loan on sanction.

Tenure & Repayment

A borrower has the option to choose a tenure of 5 to 25 years for his home loan depending on his paying capacity and age. Borrowers are often in a fix between choosing for a fixed or floating interest rate for their loan. For floating rate home loans a bank will either raise the EMI or extend the tenure of your loan to cover the higher amount due. In the case of fixed interest loans the Equated Monthly Installment (EMI) remains same unless there is a reset clause. While taking a loan, one must consider that interest rates fluctuate during the loan tenure and this fluctuation will impact the home loan EMI, whether one takes a loan at a fixed interest rate or floating interest rate. If the borrower is younger, banks are willing to give an extension on loan tenure but if the loan borrower is in 40s, the only option given is to increase the EMI.

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.

A personal loan is the most popular form of an unsecured loan available to consumers. Although we often see advertising from banks and finance companies making it appear very simple to get such a loan, its rarely as simple as that. Since the loan is unsecured banks go to great lengths to determine that your creditworthiness and repayment capacity is verified and secure.

Eligibility norms and requirements may differ slightly depending on the bank, but broadly fall in the two categories:

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

Lenders also have different policies for the minimum income requirement and maximum loan amount offered. For example, ICICI Bank would require a net monthly salary income of Rs 8,000 whereas HDFC Bank may accept Rs 7,000 and Citibank insists on a minimum of Rs 8,500. Public sector banks such as SBI and other nationalised banks have different eligibility levels for customers in metros, urban and non-urban centres. Some banks consider gross salary for income calculation. The loan amount also differs from bank to bank. The personal loan limit depends on the borrower’s profile, income, repayment capacity and credit rating.

For government owned banks minimum loan amount offered is usually around Rs.24,000 in metro and urban centres and Rs.10,000- in rural/semi-urban centres. The maximum loan amount can go upto 12 times net monthly income for salaried persons subject to a ceiling of Rs.10 lakh. But some foreign banks like Standard Chartered and Citibank have higher limits. Most banks have lists of approved companies whose employees will find it easier to get a personal loan.

Some banks also verify your application against a negative lists of professions. Banks will usually prefer to offer loans to employees or owners of reputed companies which lend a certain amount of lending credibility to their employees. You also have to reside within the prescribed city limits of the bank. Most public sector banks insist on a guarantor for personal loan even for existing account holders although some banks may offer better rates and discounts on other charges. You can increase your eligibility by clubbing the spouse’s income and taking a joint loan.

Banks and other lenders use direct sales agents normally to run a background check on the loan applicant to crosscheck the information provided at the time of application such as details on employment, salary and the place of residence. The bank wants to be convinced of your income and surplus available to service the personal loan. This is done to ensure that you are capable of making regular payments on your personal loan and repaying it on time.

Be honest in your income disclosures and keep your credit rating high. This increases chances that your loan will be approved quickly, but if you have defaulted on any loans it may go against you at the time of verification and in case you have ever declared bankruptcy it will be very hard for you to get a personal loan