Have a relationship with a private sector or a foreign bank? Then chances are you've been sounded out by the bank's call centre or direct sales agent on how easy it is to obtain a personal loan.

But then, what is a personal loan? Well, as the name suggests, it is money for personal use -- there are just no restrictions.

The interest rate charged, in the region of 12.50 to 20 per cent per annum, could easily burn a big hole in your pocket, so take it only as a last resort.

Banks are justified in charging a hefty interest rate because these are unsecured (they do not require you to offer any collateral or security) loans.

So who can avail of a personal loan? Any individual who is employed with the government (central or state) or a public sector undertaking or reputed companies or schools/ colleges/ universities with minimum two to three years service or pensioners (drawing pension through the bank which is offering the loan).

Professionals and self-employed individuals with income other than salary/ pension and having two to three years standing are also eligible.

Financial intermediaries generally specify the applicant's minimum age (21-25 years) and maximum age (60 years to 65 years at loan maturity).

The loan amount is determined by an individual's income and repayment capacity. You can club the income of your spouse to avail of a higher loan limit. The quantum of loan availed of could range from Rs 24,000 to Rs 10 lakh (Rs 1 million).

The repayment period could stretch from 12 months to a maximum of 48 months. Corporation Bank offers a repayment period of even 60 months.

The processing charge ranges between 0.5 to 3 per cent of the loan amount. You can get the loan approval in three days. Some banks insist on third-party guarantee for personal loans.

Banks normally do not levy prepayment penalties. A customer is allowed to pay more than the equated monthly installment if he/she has surplus funds so that the interest burden can be reduced. Delayed payment on overdue amount attracts penal interest.

The documents that need to be furnished with the loan application:

• 1. Proof of identity - passport/ voter's identity card/ driving license and photo.
• 2. Address proof - ration card/ telephone bill/ electricity bill/ passport copy/ trade license.
• 3. Proof of income - (a) latest salary slip showing all deductions and Form 16 with recent salary certificate (for salaried) (b) IT returns for the last two years along with computation of income for the last two years that has been certified by a CA (for others).
• 4. Bank statement of last six months.
• 5. Proof of professional qualification (for self-employed).

Public sector banks are not averse to extending unsecured personal loans. In fact, they charge the finest interest rates on personal loans. For example, Corporation Bank and State Bank of India banks charge 12.50 per cent 12.75 per cent interest, respectively. It is only that they do not make much noise about their schemes.

Banks and financial intermediaries, including non-banking finance companies, are straining every nerve to induce the credit culture among their customers.

Why such aggressive pitching? Because there's a lot of juice in these loans. They stand to earn anywhere between 8 to 12 per cent by way of net interest margin (the difference between their cost of funds and interest rate charged on the customer).

Banks mine data pertaining to their existing clients before zeroing-in on those with a clean credit record for making the personal loan sales pitch.

If you have an unblemished track record, then you are considered a safe bet and a bank will not lose any opportunity to cross-sell its other products.

If you hold the bank's credit card then you may offered a 'pre-approved' personal loan, subject to your credit card limit, at an interest rate as low as eight per cent per annum. In order to get you interested in the loan, the bank will even waive the first month's interest payment.

Caveat on cash call: Desperately seeking cash? Then the personal loan schemes offered by banks and NBFCs are for you. But remember one thing: the proposition of minimal documentation, quick approval, no guarantor/ security for personal loans sounds attractive, take it only if you need it very badly. The steep interest rate charged can be quite painful, otherwise.

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