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.

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.