Personal Loan FAQs

These personal loan FAQs thoroughly answer common personal loan questions. They cover eligibility, documentation, repayment, and refinancing options. They explain key aspects such as the maximum loan amount, factors affecting eligibility, loan tenure, and interest rates. They also provide insights into handling multiple loans, the process for closing or transferring loans and understanding additional charges like prepayment fees. Here, you will find practical advice on improving eligibility, managing EMIs, and making the right decisions when applying for personal loans. Frequently asked questions about personal loans will help you understand the basics and complexity of these loan types.

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  • Q 1. How much of a personal loan can I get?

    The amount of personal loan you can obtain depends on factors like your monthly income, credit score, existing financial obligations, and employment stability. Generally, lenders require a minimum monthly income, which varies based on location, often ranging from ₹15,000 to ₹25,000. A good credit score is usually 700 or above. It can increase the loan amount you’re eligible for, as it reflects your financial reliability. Lenders also consider your current financial commitments to ensure you can manage the additional repayments. A stable employment history further strengthens your eligibility. Based on these factors, banks and lenders determine the maximum loan amount. However, the actual amount you qualify for will vary with your financial profile.

  • Q 2. How to close the personal loan?

    To close a personal loan, first, you must check with your lender for the outstanding balance, including any interest and applicable charges. Then, request a No Dues Certificate or foreclosure statement, which details the amount required to close the loan. Ensure you have sufficient funds before proceeding. Visit the bank or lender’s branch and pay the balance in full. You can pay through online transfer or use other approved payment methods. Once you’ve paid, request a written confirmation that the loan is closed, and ask for the No Dues Certificate as proof that you have no further obligations. Also, ensure that the lender updates your loan closure in your credit report, as it positively impacts your credit score. Keep all necessary documents as proof of your loan’s successful closure for future reference.

  • Q 3. Can a personal loan be transferred to another person?

    Transferring a personal loan directly to someone else is typically not possible. Personal loans are issued based on the borrower’s financial reliability, income, and financial history, making them not transferable. Some lenders, however, may let a co-signer or guarantor take on responsibility if the principal borrower defaults. The co-signer or guarantor assumes responsibility for the remaining loan debt in such circumstances.

  • Q 4. Is a personal loan secured or unsecured?

    A personal loan is usually unsecured, meaning you don’t require collateral, such as property or a car, to obtain it. This differentiates it from secured loans, where the borrower must pledge an asset as security. Because no collateral is involved, lenders rely on your credit score, income, and employment history to assess your eligibility and the loan terms. This lack of security often leads to higher personal loan interest rates than secured ones. This type of loan is readily available, but approval depends heavily on your financial profile.

  • Q 5. What is the maximum loan duration for the personal loan?

    The maximum duration for a personal loan is generally between 5 to 7 years, though a few lenders may extend it to 10 years under certain conditions. The loan tenure you choose affects your monthly payments and the overall interest you will pay. A longer tenure can reduce monthly instalments, making it easier to manage, but it also increases the total interest paid over the loan period. Consulting with your lender helps clarify your options and find a balance between affordable repayments and interest costs. Many banks and financial institutions offer tools to calculate different repayment schedules based on tenure.

  • Q 6. Are personal loans taxable?

    Personal loans are not taxed because they are considered borrowed rather than earned income. The loan principal amount is not taxable income and must be repaid. The profits may be taxable if the loan is used to generate income, such as investing in a business or purchasing an item. Tax breaks may be given on the interest paid on personal loans used for particular purposes, such as home renovations or company investments. These benefits can minimise the tax burden, but sufficient documentation is required to prove the loan’s purpose. Consult a tax professional or check current tax rules to confirm if personal loan interest is deductible.

  • Q 7. What documents are required for a personal loan?

    There are specific documents required for a personal loan in India. These include identity proof, such as a passport, PAN card, Aadhaar card, voter ID, or driving licence. You may need utility bills like electricity or gas or documents such as a passport or Aadhaar card for address proof. Salaried individuals need recent salary slips, bank statements showing salary deposits, and Form 16 to prove income. Self-employed individuals need income tax returns, bank statements, and audited financials. Employment proof, such as an employment certificate or appointment letter, is also required. Recent passport-sized photographs are usually part of the documentation. Since requirements vary by lender, checking with your bank or financial institution for any specific needs is wise.

  • Q 8. Can I apply for a personal loan if I have a low credit score?

    Yes, you can apply for a personal loan even with a low credit score, but approval may be challenging. Lenders view low credit scores as higher risk, which can lead to higher interest rates or stricter terms. To improve your chances, consider applying for a smaller loan amount, as lenders may be willing to approve lower sums for applicants with poor credit. Providing proof of a stable and sufficient income can also reassure lenders of your repayment ability. Alternatively, applying with a co-applicant or guarantor who has a good credit score can strengthen your application. Some lenders specialise in loans for individuals with low credit scores, but these often come with higher interest rates. It’s advisable to check your credit report for errors and work on improving your credit score over time to access better loan terms in the future.

  • Q 9. How does my employment type (e.g., freelancer, contractor) affect personal loan eligibility?

    Your employment type significantly influences personal loan eligibility. Lenders often prefer salaried individuals due to their stable income, making loan approval more straightforward. Irregular incomes pose challenges, especially for freelancers or contractors, leading to strict scrutiny. To improve your chances, maintain a good credit score and provide comprehensive financial documents, such as tax returns and bank statements, to demonstrate consistent earnings. Some lenders offer personal loans for self-employed individuals, considering factors like business stability and income consistency.

  • Q 10. What is the average processing time for personal loan approval?

    The processing time for personal loan approval in India varies and usually takes 2 to 5 working days for new applicants. Some banks offer instant approvals for pre-approved customers with existing relationships, sometimes disbursing funds within seconds. The speed of approval depends on the completeness and accuracy of the documents provided. Delays can occur if additional information or verification is required. To expedite the process, applicants should ensure that all necessary documents, such as identity, address, and income proof, are up-to-date and correct. Additionally, applying online with digital banks can sometimes result in faster processing due to streamlined digital verification. On average, lenders with efficient systems aim to complete the entire process within a few days, making personal loans a quick financing option if requirements are promptly met.

  • Q 11. Are there any specific charges involved besides interest rates for personal loans?

    Yes, personal loans in India involve several charges apart from interest rates. A processing fee is generally charged as a one-time fee, ranging from 0.5% to 2.5% of the loan amount, covering administrative costs. Additionally, prepayment or foreclosure charges may apply if you repay the loan before its tenure ends, usually between 2% to 5% of the outstanding amount. If you miss or delay EMI payments, you may face late payment penalties, which can also impact your credit score. Goods and Services Tax (GST) applies to these fees, adding to the overall cost. These charges differ by lender, so reviewing the loan terms thoroughly is important to understand all related costs. This helps avoid surprises and enables better financial planning for loan repayment.

  • Q 12. How can I improve my eligibility for a higher personal loan amount?

    To increase your chances of qualifying for a larger personal loan, focus on having a great credit score, preferably 750 or higher, by paying bills and existing loan EMIs on time. A high credit score suggests trustworthiness, influencing how much lenders are ready to offer. Increasing your income through a salary rise, a side job, or other sources improves your loan eligibility. Reducing existing commitments, such as credit card balances or other loans, decreases your debt-to-income ratio and shows lenders you can handle more borrowing. A solid employment history improves eligibility since it shows consistent income. If possible, applying with a co-applicant who has a solid credit score will help you acquire better loan terms.

  • Q 13. Does the lender verify how I use the personal loan funds?

    Lenders typically do not monitor how you use the personal loan funds. Personal loans are unsecured and versatile, allowing you to use the money for various purposes, such as home renovations, medical expenses, or travel. However, using the funds responsibly and for legal activities is important. Misusing the loan illegally can lead to legal penalties and damage your financial reputation. While lenders may not track your spending, they expect you to adhere to the loan agreement’s terms and conditions. Responsible use of the loan and timely repayments will help maintain a good relationship with the lender and positively impact your credit score.

  • Q 14. Can I prepay or foreclose my personal loan early, and are there any fees?

    Yes, you can pay off or foreclose a personal loan early, but most lenders in India demand a fee for this service. These fees, known as prepayment or foreclosure charges, usually vary between 2% and 5% of the outstanding loan amount. These fees are intended to compensate the lender for the interest income lost if the loan is terminated early. Some lenders impose a lock-in period, usually the first 12 months, during which prepayment is not authorised. You should review your loan agreement or speak with your lender to understand these terms and conditions fully. Early repayment may reduce total interest payments, so consider the benefits against any fees. Planning can help you make wise financial decisions and save money on interest.

  • Q 15. Is it possible to increase the loan amount after initial disbursement?

    Yes, following the initial disbursement of a personal loan, you may apply for an increase in the loan amount using a top-up loan. A top-up loan allows you to borrow more money than your current loan, often at the same interest rate. Eligibility for a top-up loan is determined by your repayment history, credit score, and the lender’s policies. Lenders usually want you to pay many EMIs on your existing loan before evaluating a top-up application. The total amount of your existing loan plus the top-up should not exceed your overall loan eligibility. It is important to contact your lender to learn about their terms and conditions for top-up loans.

  • Q 16. How does a personal loan impact my credit score?

    Taking a personal loan can affect your credit score in several ways. Initially, applying for a loan results in a hard inquiry on your credit report. This may cause a slight, temporary dip in your score. Once approved, the loan adds to your credit mix, potentially strengthening your score if you manage it responsibly. Consistently making timely payments demonstrates good credit behaviour, positively impacting your score. However, missing payments or defaulting can significantly harm your credit rating. Additionally, a personal loan increases your total debt, which can affect your credit utilisation ratio. Maintaining a low credit utilisation ratio is beneficial for your credit health. Therefore, while a personal loan can improve your credit score through responsible management, it can also have negative effects if not handled properly.

  • Q 17. What happens if I miss an EMI payment on my personal loan?

    Missing an EMI payment on a personal loan might have various consequences. For example, lenders may charge late fees, increasing your total debt. Missed payments are also recorded to credit bureaus, damaging your credit score and impacting future loan approvals. Repeated defaults may cause lenders to consider your loan a non-performing asset, potentially leading to legal action. To avoid these problems, make timely payments or communicate with your lender if you are experiencing financial difficulties.

  • Q 18. How do lenders assess my repayment ability for a personal loan?

    Lenders assess your repayment ability for a personal loan by examining key financial factors. They first review your income level to ensure you can manage the monthly loan repayments comfortably. Employment stability guarantees consistent income, such as a steady job history, making lenders more confident in your repayment capacity. Your high credit score also plays a significant role, reflecting responsible financial behaviour and increasing loan eligibility. Additionally, lenders consider existing debts to check if you can handle further debt without strain. Age is another factor, as it helps determine the suitable loan tenure and whether repayment is feasible within that timeframe. By analysing these aspects, lenders decide on the approval, loan amount, and terms they can offer, ensuring you can repay the loan without financial stress.

  • Q 19. Can I transfer my personal loan to another lender for a better interest rate?

    Yes, you can use a personal loan balance transfer to switch to a lender that offers a better interest rate. This means shifting your outstanding loan balance from your current lender to a new one with lower interest rates. This can help reduce your monthly EMI payments and overall interest burden. It is essential to consider additional costs, such as processing fees and prepayment charges from your present lender. Ensure that the savings from the reduced interest rate outweigh the expenses. Before proceeding, compare offers from multiple lenders and compute the total cost to make an informed decision.

  • Q 20. Is a guarantor needed for a personal loan?

    In India, a guarantor is not always required for a personal loan. Lenders assess your credit reputation based on credit score, income, and employment stability. If you have a strong credit history and meet the lender’s criteria, you can often secure a personal loan without a guarantor. However, if your credit score is low, your income is unstable, or you have a limited credit history, the lender may request a guarantor to mitigate their risk. A guarantor is someone who agrees to repay the loan if you default. Having a guarantor can improve your chances of loan approval and may lead to more favourable terms. It’s important to note that the guarantor should have a good credit score and a stable financial background.

  • Q 21. What are the steps to follow if I want to cancel my personal loan application?

    To cancel a personal loan application, contact your lender by phone or email and advise them of your choice. Provide the required information, such as your application reference number and personal identification, to assist the lender in locating your application. After informing them, ask for written confirmation that your loan application has been successfully terminated. This confirmation serves as proof and helps to avoid future misunderstandings. Even if the application is cancelled, the lender’s initial credit inquiry may still appear on your credit record. This has little impact on your credit score. Following these procedures will ensure a seamless cancellation process for your loan application.

  • Q 22. How are EMI amounts calculated for a personal loan?

    EMI for a personal loan is calculated using a specific formula. The formula is EMI = [P x R x (1+R)^N] / [(1+R)^N – 1], where P is the principal loan amount, R is the monthly interest rate (annual rate divided by 12), and N is the loan tenure in months. For example, if you take a loan of ₹5,00,000 at an annual interest rate of 12% for a term of 5 years (60 months), you would first convert the annual rate to a monthly rate, giving you 1% or 0.01 per month. Plugging these values into the formula would provide an EMI of approximately ₹11,122. This means you will have to pay ₹11,122 each month for the duration of the loan, allowing you to repay the loan amount and interest systematically.

  • Q 23. Can I take a personal loan if I already have an existing home or car loan?

    Yes, you can apply for a personal loan even if you have an existing home or car loan. To determine your eligibility, lenders assess your overall financial health, including your income, credit score, and current debt obligations. A strong credit history and stable income can improve your chances of approval. However, having multiple loans increases your debt-to-income ratio, which may affect the loan amount you’re eligible for and the interest rate offered. It’s important to ensure that you can comfortably manage the repayments for all your loans to avoid financial strain. Before applying, consider using a loan eligibility calculator to understand how an additional loan might impact your finances.

  • Q 24. How does a personal loan top-up work, and who is eligible for it?

    A personal loan top-up allows you to borrow additional funds on top of your existing loan. It is an excellent option if you need money but prefer not to take a new loan. The top-up amount is applied to your existing loan, and your repayment schedule is altered appropriately. To be qualified for a top-up loan, you must have an active personal loan with the lender, a strong repayment history, and a track record of timely EMI payments. Lenders typically want you to have completed a particular number of EMIs, usually about 12, before accepting a top-up request. Furthermore, sufficient income and a good credit score are required to handle the larger loan amount.

  • Q 25. Is there an age limit for personal loan applicants?

    Yes, there is an age limit for personal loan applicants in India. Lenders generally set minimum and maximum age requirements to ensure borrowers can repay the loan within the tenure. For salaried individuals, the age range is usually between 21 and 60 years. For self-employed individuals, it often extends up to 65 years. Some lenders may have different criteria; for instance, Bajaj Finserv offers personal loans to individuals aged 21 to 80 years.  It’s important to check the specific age requirements of the lender you’re considering, as they can vary. Meeting the age criteria is essential for loan approval, as it reflects the borrower’s ability to repay the loan within the stipulated time frame.

  • Q 26. What documents are needed to refinance an existing personal loan?

    You will need the required documentation to complete the refinance application for an existing personal loan. Identity proof, such as a passport, PAN card, Aadhaar card, voter ID, or driver’s license, is required, as is address proof, such as utility bills, a passport, or an Aadhaar card. Income evidence is also necessary; salaried individuals should have current salary slips, bank statements showing salary credits, and Form 16, while self-employed candidates should provide tax returns and bank statements. An employment certificate or appointment letter might help prove your employment status. You’ll also need documentation connected to your existing loan, such as the original sanction letter, a description of the outstanding loan amount, and a repayment schedule from your present lender.

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