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THE PERSOANL LOAN PRIMER

All your queries about personal loans answered

What is a personal loan?
A Personal loan is any purpose loan. Lenders do not enquire about the end use of the funds. One can use it to fulfill any requirement - be it personal or business. No security is required to avail a personal loan.

How do I obtain a loan?
In order to obtain a loan, one has to apply in the prescribed form available at the office of the bank or finance company. You can also apply online or download the forms from their respective websites.

Who can avail of a personal loan?
Personal Loans are extended to customers who have an assured and steady income. There are three broad categories: salaried individuals, self employed professionals, and self employed individuals.

Are there any conditions that a salaried individual has to fulfil to avail of a personal loan?
An individual has to fulfil the following basic conditions.
The age of the individual should be at least 21 years at the start of the loan and at the most it can be 65 years or the retirement age, whichever is lower, by the time the tenure of the loan ends.
His gross income should be greater than Rs. 75,000 per annum.
His bank account should been in operation for at least one year.
He should have lived in his current residence for a minimum one year.
He should have a telephone at his place.
He should have been in his present employment for at least two years.

What conditions must a self-employed individual fulfuil to avail a personal loan?
A self - employed individual has to fulfil the following basic conditions:
The individual should be at least 21 years of age and should not exceed 65 years at the end of the loan period
His net profit should be greater than Rs. 75,000
He should have been in business for at least 2 years

The same criteria as stated above apply for bank account, telephone and current residence.

On what factors does loan amount depend?
The various factors on which the loan amount depends on are:
Income of the person: Finance companies give a loan of 4-12 times the monthly take home income.
Instalment to Income ratio (IIR): Most finance companies give loans so that monthly instalment to monthly income ratio is in the range of 35-50 percent.
Tenure of loan: The tenure of the loan may be 12, 24, 36, or 48 months. As the tenure increases the loan amount also increases.
Classification of the person: Finance companies specify maximum eligible finance based on borrower classification. Hence, the maximum loan amount for salaried persons will vary from the maximum loan amount that a self-employed person can avail.

What is the maximum I can borrow?
It is generally linked to your payment capacity. Usually, the installment-to-income ratio (IIR) ranges between 25 and 50 per cent. The loan amount is also limited by the upper ceiling on the loan amount that a finance company can lend.

How does the finance company decide the loan amount I am eligible for?
The loan amount will be determined on the basis of your repayment capacity, which, in turn, depends upon your income and other factors such as your age, qualifications, number of dependents, stability in job, and stability and continuity of income. In certain cases income of the spouse/ family member can also be clubbed to decide the eligible amount.

The lender considers all the income accruing to you on a monthly basis, i.e., all the recurrent credits, basic salary, HRA, other allowances, but not LTA and medical In short, the calculation will be as per your net cash inflows, less expenses for salaried individuals, and as per the profit-and-loss account of the self-employed.

For example, an individual has a salary of Rs. 3,00,000 p.a. Taking all factors into consideration, the lender decides that the individual has an annual repayment capacity of, say 1/3 rd of his income, meaning Rs. 1,00,000. This would work out to an EMI paying capacity of Rs. 8300 per month.

Once the EMI capacity of the person has been estimated and the tenure of loan repayment is known, the lender decides on the amount of the loan.

This is done with the help of the EMI table. In this case let's take the repayment schedule as a period of 10 years. Going by his EMI capacity of Rs. 8300, this individual can go for a loan of about Rs. 5 lakh for a period of 48 months. Here the EMI work out to Rs. 8145 per month at 20 per cent compound interest on monthly rest on a loan of Rs. 5 lakh.

Some lenders have a plain vanilla deal for professionals such as CAs, doctors, and MBAs: it is 1-2 times gross receipts. Amount of loan also depends on the tenure that the person requires the loan for.

Who is a co-applicant?
Personal loan is taken either in a single name by an individual, or jointly, where there could be more than one person seeking the personal loan. If there is more than one person seeking the loan, then they are co-applicants.

Who can my co-applicant be?
If you are an individual, your spouse, parent or children can be your co-applicants and their income can be clubbed with you income to meet the eligibility criteria.



www.BajajCapital.com


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