A Personal Loan is a loan that is granted by a Bank or Finance Company to an individual to fulfil his/her financial requirement for any purpose whatsoever. Since the purpose of the loan is not defined or is not restricted, these loans are generally unsecured, i.e. there is no need to pledge, hypothecate, or mortgage any asset(s) as security or collateral for a Personal Loan. Most Banks and Finance Companies do not even require a guarantor for a Personal Loan and base the decision to lend money primarily on the credit worthiness of the borrower.

   Generally, borrowers look for a Personal Loan for one of the following purposes, though this list represents only a fraction of the uses for a Personal Loan:

• Purchase of assets and consumer durables
• Travel
• Emergency Medical needs
• Business Expansion
• Home Improvement
• Tax savings Investment
• Higher Education
• Loan takeover from other financiers/balance transfer for cards

   Personal Loan is therefore a quick and simple way to finance any need. However, since the loan is unsecured it carries a significantly higher risk for the Bank or Finance Company as compared to a secured loan like a home loan or a car loan and therefore carries a higher interest rate than most secured loans. So if one is looking to finance a specific need like a home purchase or a car purchase, a personal loan may not be the best option to recommend. However, a Personal Loan may be a good option to bridge the margin money requirement for the same, i.e. the difference between the price of the home and the amount of Home Loan approved.

   Nevertheless, if you were to compare Consumer Durable Loans with Personal Loans, the two would be quite similar except that the interest rate for a Personal Loan will in most cases be lower than a Consumer Durable Loan. One would have to negotiate hard on the Cash Discount on the product available that the Dealers are utilising to camouflage the interest rate on Consumer Durable Loans. If the loan amount required is higher than Rs.25000/- or so, the best option would be to strike a deal with the dealer for upfront cash payment and then separately work out a Personal Loan at attractive terms to fund the same.

   Personal Loan offered by most Banks and Financial Institutions cover the following three broad borrower segments:

• Salaried Individuals
• Self-Employed Professionals - Doctors, Chartered Accountants, & Architects.
• Self-Employed Businessmen and Traders

   The eligibility criteria, interest rate, processing fee, loan tenure and loan amount depend on the segment to which a borrower belongs. E.g. a Self-Employed Businessman may get maximum loan tenure of 3 years whereas a Doctor may get maximum loan tenure of 5 years. Similarly a Doctor may get an interest rate of 14% p.a. whereas a Self Employed Businessman may get an interest rate of 23% p.a.

   In the last 4-5 years, consumerism per se has led to a growth in the financial needs of the middle and upper middle class society in India. With the entry of Private Sector Banks, the availability of options to the customer has grown. Competition amongst the players has led to easing of eligibility norms, introduction of income surrogates for determining eligibility, and simplification of documentation. Overall this has meant that a larger section of the population now has access to funds at their doorstep.

   Generally, Banks and Finance Companies offer only fixed interest rates on Personal Loans and the trend of floating interest rates has not yet caught on in this product. All the Banks and most of the reputed Finance Companies compute and communicate interest rate on reducing balance applied at monthly rests. Thus, there is a fair amount of uniformity in the interest rate computation methodology for Personal Loans. The interest rate band varies from 13% p.a. to 23% p.a. depending on the borrower profile. This interest rate band refers to the prime segment to which most Banks and Financial Institutions cater which comprises of executive/managerial cadre earning a Net Monthly Income of over Rs.8,000/-. However, there are non-prime segments to which few Finance Companies, like Citifinancial and GE Countrywide, cater to at much higher interest rates that vary between 35% p.a. to 50% p.a.

   There is a one time processing fees applicable on Personal Loans and that is generally 2% of the Loan Amount sanctioned. Again, all Banks and most of the reputed Finance Companies deduct the processing fees from the loan disbursement. No Bank or Finance Company permits its agents to collect Processing Fees from its customers in the Agents name. There is no cost to the borrower prior to Loan Approval.

   Other costs involved in a Personal Loan that borrowers need to be aware of prior to borrowing money are the prepayment charges, check swap charges, check dishonouring charges and additional/penal interest rate applicable in case of default. The most critical of these is the prepayment charge that can be as high as 5% of the outstanding loan balance in case of some Banks or Finance Companies.

   Few tips to help you get a Personal Loan with ease:

• Maintain a healthy financial track record on loans that have been availed from any Bank or Financial Institution.
• Keep you main income account or salary account clean and avoid derogatory items like cheque bounces, minimum balance charges, and immediate withdrawal after credit to the account. Maintain average balance equal to at least the EMI you expect to pay on the proposed Personal Loan.
• Make all Credit Card Payments timely. Even if you chose to pay only the minimum amount due, be sure to pay that prior to the payment due date.