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.

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.