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Intorduction
Personal loans can be used for various purposes, including medical emergencies, home renovations, education expenses, wedding costs, travel, debt consolidation, or any other personal financial need. Lenders usually do not impose restrictions on the use of funds.
In India, personal loans are governed by various rules and regulations set by the Reserve Bank of India (RBI) and other relevant authorities
RBI Rules for Personal Loans
The Reserve Bank of India (RBI) sets guidelines and regulations for personal loans to ensure transparency, fairness, and consumer protection.
- Lenders must disclose the annualized interest rates to borrowers at the time of sanctioning the loan. This helps borrowers understand the actual cost of the loan.
- Lenders can charge processing fees, but they must be transparently communicated to the borrower upfront.
- These charges, if applicable, must be disclosed to the borrower. In many cases, RBI encourages banks to allow foreclosure without any penalty, particularly for floating-rate loans.
- Clear communication of loan terms and conditions, including interest rates, fees, and charges.
- Establishment of a proper grievance redressal mechanism for addressing customer complaints.
- Ethical practices for loan recovery, prohibiting harassment or undue harassment of borrowers.
- Lenders must comply with KYC norms to verify the identity and address of the borrower. This includes obtaining proof of identity, address, and other necessary documentation.
- Lenders are required to report personal loan information, including repayment history and defaults, to credit information companies (such as CIBIL, Equifax, Experian, and CRIF High Mark). This helps in maintaining a credit score for borrowers, which reflects their creditworthiness.
- If lenders wish to recall/cancel/request faster repayment, they must provide adequate notice to the borrowers
- Borrowers are not to discriminate based on caste, religion, sex, etc.
Terms and Conditions for Personal Loans
- The eligibility criteria for personal loans are tailored to ensure that borrowers are in a position to repay the same. Each lender has different eligibility criteria in place.
- Most lenders provide loans to those between the ages of 21 and 57. This is because most individuals within this age group have a set income in hand and are in a position to repay the loan.
- the income of a borrower has to be above a certain threshold. Some lenders only provide personal loans to those who are salaried as the risk is higher with self-employed borrowers.
- Most lenders require borrowers to have a credit score of over 700, especially for personal loans as there is no collateral required. Those who have low credit scores or a fragmented credit repayment history will have a harder time getting loans as lenders are unable to trust their repayment capacity.
FAQ
What are the features of Personal Loans?
Personal loans can be used for various purposes, including medical emergencies, home renovations, education expenses, wedding costs, travel, debt consolidation, or any other personal financial need.
The amount that can be borrowed typically ranges from a few thousand rupees to several lakhs, depending on the lender’s policies and the borrower’s eligibility. The amount approved is often based on the applicant’s income, credit score, and repayment capacity.
The loan tenure usually ranges from 1 to 5 years, but some lenders may offer longer or shorter tenures. Borrowers can choose the tenure based on their repayment capacity and financial planning
Interest rates on personal loans can be fixed or floating. They are generally higher compared to secured loans because there is no collateral. Rates vary based on the lender, the borrower’s credit score, income, and other factors.
Repayment is typically done through Equated Monthly Installments (EMIs), which include both the principal and interest components. Borrowers can opt for automatic debit from their bank accounts or pay through other means as agreed with the lender.
Eligibility criteria vary by lender but generally include factors like age, income, employment status, credit score, and existing debts. Both salaried and self-employed individuals can apply.
Required documents usually include proof of identity, address, income, and employment, along with recent photographs. The specific documents needed may vary by lender
Personal loans are often processed quickly, especially with the rise of digital lending platforms. Some lenders offer instant or same-day approval and disbursement.
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