LoanRaja Blog- Personal Finance Guide

Unforeseen circumstances can land anyone in a financial crisis. Sudden loss of job, divorce, a serious accident, a major surgery or death of a dear one create need for urgent cash for which we may not be prepared. There may arise an opportunity for a foreign travel for which you don’t have immediate cash. How to find the required amount in the shortest possible time is a difficult choice to make. Do you want funds readily available to you whenever you need or desire? Personal loan is the answer. It is an any-purpose, no-questions-asked loan given by most banks and NBFCs. Interest rate is high as it is unsecured loan.

In case you have a little more time at your disposal you can explore the possibility of a Loan Against Property (LAP). If you own a valuable asset like a house or commercial property you can raise a loan against it. It is much cheaper than a personal loan as it is secured loan. But processing and documentation will take more time. First the lending bank has to get the property valued and has to be convinced about the repaying ability of the borrower. The loan is given as a certain percentage of the property’s market value (around 40 -60 per cent). Lending institutions have different threshold limits for Loan Against Property.

Tenure

Such a loan is usually available for a five-year period. LAP will have a longer tenure than a personal loan, usually a maximum of 10 years. The advantage of personal loan is that it requires less paper work and is sanctioned sometimes within three days. But the lender has to be convinced on your ability to repay the loan. Nobody is going to give you a personal loan of Rs.1 crore. The only way to get a loan for such an amount is to mortgage a property valued around Rs.1.75 cr. One can get personal loans from Rs.24,000 to ten lakhs. The threshold limit for loan against property is much higher.

Eligibility

Eligibility norms and documentation for personal loans and LAP slightly differ. While a customer seeking a personal loan must have a net monthly salary of at least Rs.7,000, a person seeking LAP must have a net monthly salary of at least Rs.12,000. Age requirement is 21-60 years in the case of salaried and for self-employed it is 21-65 years. It is same for personal loan and LAP. For both the loans identity proof, residence proof and income proof have to be furnished. Salaried individuals have to submit their latest salary slip, Form 16 and bank statement for the last 3 months.

Self-employed customers have to furnish copies of their IT returns for the last 2 years, balance sheet, and profit & loss account, bank statements for the last 6 months. For loan against property, photocopies of all documents related to property have to be handed over before approval of the loan. A valuation report of the property from the professional valuer appointed by the bank is a must. Some banks insist on the borrower to give an undertaking that the loan won’t be used for any purpose other than what is mentioned in the loan agreement. This is to avoid diversion of loan for speculation.

A borrower has to submit three additional documents apart from what is required for a normal housing loan. Copies of all the property documents have to be handed over before approval of the loan. Borrower has to give a declaration stating that the loan amount would not be used for any other purposes. A valuation report of the property from the professional valuer appointed by the bank is a must. Identity proof and proof of residence along with income proof has to be provided. Salaried individuals have to submit their latest salary slip, Form 16 (along with salary certificate from the employer), and bank statement for the last 3 months. Self-employed people have to furnish copies of their IT returns for the last 2 years, balance sheet, and profit & loss account, bank statements for the last 6 months.

LAP allows you to keep your property and have liquid funds. It is the cheapest retail loan after housing loan. Fixed rate loans are rare now as banks find floating rate more profitable. It is 30-40 percent cheaper than personal loan. Entrepreneurs find LAP an ideal source for funds for business expansion. Many borrowers land in debt trap after availing personal loans, which attract stiff penal interest in case of delayed payments. Failure to read the fine print can push a borrower deeper into debt.

Every entrepreneur has aspirations to make it big in business. But paucity of finance is a hurdle quite often. Now business loans are offered by almost all banks to help traders, businessmen and professionals to start or expand their commercial activities. Loans to self-employed professionals such as chartered accountants, architects and doctors also form part of this. These loans are available at competitive interest rates and low EMIs to widen the customer base. Every small and medium sized enterprise needs access to working capital. Simple unsecured business loans are available to small and medium enterprises for all the working capital needs.

No uniformity

Business loans are both secured and unsecured. Banks give business loan in the form of business installment loan, overdraft, loans against property, security and fixed deposits. The minimum tenure is 12 months and maximum 48-60 months. There are wide variations in the schemes provided by different banks and the amount of loan granted. It can be anywhere from Rs.25,000 to Rs.5 cr. SBI’s Traders easy loan scheme provides loans to entrepreneurs, professionals and self-employed. Standard Chartered Bank has a business installment loan. A business installment loan (BIL) is a loan, which allows you to borrow cash to accommodate your business needs whether for short-term working capital funding or to support your expansion plans. Repayment is by EMI through post-dated cheques.

Loan under SBI’s scheme is sanctioned against equitable mortgage of property. The loan can be repaid in monthly or quarterly, or half yearly installments in a period up to 5 years. Minimum and maximum amount of loan is Rs 25,000/- and Rs 5 crore. Business requirement is assessed on the basis of projected business turnover. Interest at floating rate is charged at monthly intervals on daily reducing balance. Standard Chartered Bank offers two borrowing options: Borrowing against the fixed deposit and taking an unsecured loan. When your enterprise requires urgent finance, an overdraft against your investments may be just the right option. An advantage is that you pay interest only on the amount utilized.

Every lender wants to make sure that loan will be paid back. Collateral property is the common way. But risk factor is always there. Banks will analyse your previous experience in the business and your success chances of your new business plan. If you want to take a loan for expanding your business the lenders will analyze your business history, tax returns, revenues and liquid assets. If you are planning to start new business the process may be complicated. How you present your business plan plays key role in getting a loan.

Eligibility

Business credit is generally offered to the following types of concerns: Sole proprietorships, partnerships and private limited companies. Income requirements: Net Income of the concern should be more than Rs. 1,50,000 per annum for business credit up to Rs. 15 lakh and over Rs.3 lakh for business credit above Rs. 15 lakh and up to Rs. 35 lakh. A maximum of two incomes of the partners / directors holding a minimum of 25% stake each can be clubbed to the income of the concern.

Documents

There are differences in the documents required for sole proprietorship firm, partnership firms and private limited companies.

• Proof of identity of the sole proprietorship firm.
• Proof of individual identity to be submitted for the proprietor.
• Proof of residence address to be submitted for the proprietor.
• Certified profit and loss and balance sheet for last two years.
• Copies of IT returns for the last two years.
• Bank statements for last 6 months for business credit up to Rs. 15 lakh and last 12 months for business credit above Rs. 15 lakh.

In the case of partnership firms proof of identity of the partnership firm as well as proof of individual identity for the all partners have to be submitted along with a copy of the partnership deed. For a limited company proof of identity of the limited company, copies of memorandum and articles of association, certificate of incorporation, board resolution, copy of annual return establishing the shareholding pattern have to be submitted.

Charges

A processing fee of minimum one percent of the loan amount is generally charged. There are variations. Banks deduct it from the loan amount, which will then be credited to the current account of the borrower. Some banks charge prepayment charge of up to 5 percent while others don’t charge anything. In the case of overdraft there is an annual review and lender will charge an annual fee every year.

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.