Personal Loan Agreement – Things You Should Know

A personal loan is a readily available option for covering short-term expenses beyond one's regular income, without requiring collateral. It has a flip side though. On the one hand, it increases the resources at one’s disposal, but since the money has to be returned in installments starting soon after the money is borrowed, it also tends to decrease the disposable income as one would have to pay equated monthly installments, or EMIs, to repay the debt.

As a result, it also affects the creditworthiness of the borrower. Thus, it is crucial for borrowers to be familiar with the terms and conditions of personal loan agreements.

Things To Keep In Mind

• Eligibility:

To be eligible for a personal loan, there are certain basic criteria to fulfil, which may vary from lender to lender. These include age, typically ranging from 21 to 60 years old, with some lenders extending loans to senior citizens up to 80 years old. Additionally, some lenders may require the borrower to have a salaried income as a condition while others offer the loan to self-employed people, too.

• Documents:

To apply for a personal loan, the applicant must complete the application form and provide basic Know Your Customer (KYC) documents, such as proof of identity and address, as well as their PAN number. It's important to ensure that the information provided is accurate and up-to-date, and to avoid misrepresentation.

• Utilisation:

Typically, a personal loan does not have any restrictions on how the funds can be used. However, it's important to review the terms and conditions of the lender to confirm this and avoid violating the agreement.

• Interest Rate:

The repayment of a personal loan is crucial, as it involves not only the principal amount borrowed but also the associated interest and other charges. It's essential for borrowers to carefully understand the actual interest rate being charged and not be misled by attractive offers. One way to do this is by independently verifying the EMI amount based on the advertised interest rate, which can be done on an unbiased website.

• Duration:

The tenure or duration is a crucial aspect of a personal loan, as it specifies the period during which the borrowed funds and associated charges must be repaid. While the typical tenure for a personal loan is one to three years, some lenders may offer longer repayment periods based on the loan amount.

• Part-Payment:

In the event of receiving a lump sum amount, it's possible for the borrower to make a partial prepayment on the outstanding personal loan, which can help reduce the overall interest cost. However, most lenders only allow this after the first three EMIs are paid, and there may be a restriction on the maximum amount that can be prepaid in a financial year. Additionally, some lenders may impose other conditions, such as the requirement that the source of funds used for pre-payment should be the borrower's own.

• Missed Payments:

While the terms of a personal loan remain confidential between the lender and borrower, if a borrower misses a scheduled EMI payment or fails to pay any associated charges, the lender may report the delinquency to credit bureaus. This can negatively impact the borrower's creditworthiness and credit score, which may make it harder to borrow in the future, and potentially at higher interest rates.

• Others Charges:

In addition to the requirement to repay the principal amount and the agreed-upon interest charge, personal loans may also include other fees, such as loan processing charges. There may also be prepayment charges, which are typically a percentage of the amount being prepaid.

• Co-Applicant and Guarantor:

Personal loans allow the borrower to rope in a co-applicant or borrower or a guarantor as part of the agreement. This could potentially allow a person with low credit score to borrow, borrow a larger sum than what he or she may be eligible for independently and that too with sweet terms. For this, the co-applicant or guarantor would need to have a high creditworthiness.

Conclusion

A personal loan can be a lifesaver for individuals facing a situation where they need to spend more money than they currently have at their disposal. However, there are several important factors to consider when taking out such a loan. These include the loan agreement's terms and conditions, prepayment options, fees, and how the loan may impact the borrower's creditworthiness and credit score. To avoid incurring unnecessary charges down the line, it's crucial for borrowers to fully understand these factors and carefully consider their actions both before and after taking out a personal loan.

IIFL Finance offers personal loans to individuals from Rs 5,000 to as much as Rs 5 lakh at attractive interest rates and can be availed for up to 42 months, without furnishing any security.