A Complete Guide to Personal Loan

31 Oct 2022

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What is Personal Loan? (Meaning & Definition of Personal Loan)

  • A personal loan does not require the borrower to provide collateral and so it is an unsecured loan.
  • The purpose or intention of a personal loan is to fund immediate financial contingencies.
  • It could be for business capital, marriage, medical expenses, or even foreign trips, though the end use of the capital really depends on the borrower, as long as it is for a legitimate financial need.
    Let us look at the different aspects in this complete guide to personal loan.

What are Different Types of Personal Loan?

  • Unsecured Personal Loan - borrowed without any asset or collateral.
  • Secured Personal Loan - borrowed against collateral, such as a home, car, savings account, insurance, gold or another asset.
  • Personal Line of Credit - borrowed whenever needed by accessing a line of credit up to a specific amount.
  • Personal Loan Against Credit Card - borrowed against credit card’s available balance.
  • Pension Loan - borrowed by retired personnel or senior citizens.
  • Wedding loan - borrowed to meet wedding expenses.
  • Vacation loan - borrowed to finance a holiday trip.
  • Home renovation loan - borrowed to make renovations to the home. It helps to increase the value of the house in the real estate market.
  • Consumer durables loan - borrowed to buy consumer goods such as home and electrical appliances.

Personal Loan Eligibility

Since these loans are unsecured- at what rate of interest you will get the loan and how much, whether or not you will get the loan-depend on the credit quality of the borrower. If you have good creditworthiness, you are likely to get the loan at an attractive rate of interest. If you have been a long time customer with the bank, with sound track record of financial discipline, you may also get a pre-approved personal loan sanction.

List of Individuals who are Eligible for Personal Loan

Bank of Baroda lists the following types of employees/self-employed individuals who are eligible for personal loans.

  • Employees of Central / State Govt. / Autonomous Bodies/ Public / Joint Sector Undertakings, Public Limited Co. / MNCs & Educational Institutions – with minimum continuous service for 1 year
  • Employees of Proprietorship, Partnership firms, Private Limited companies, Trust - with minimum continuous service for 1 year
  • Insurance Agents- doing business for minimum last -2- years
  • Self Employed Professionals (Doctor, Engineer, Architect, Interior Designers, Tech. and Management Consultants, Practicing Company secretaries etc) -- with minimum 1 year stable business.
  • Self Employed Business individuals - with minimum 1-year stable business.

Documents Required for Personal Loan

  • Two passport-size photographs
  • Income proof: Bank Statement for the last 3 months (if salaried)
  • Identity proof: Passport/PAN Card/Driving License/Voters ID/Aadhar Card
  • Residence proof: Passport/Aadhaar Card/Utility Bill/Voter ID
  • Continuity in Current Job Proof - Form 16/Company Appointment Letter (if salaried)
  • Income Tax Returns for the last 2 years (if professional/self-employed)

Personal Loan Fee & Charges

  • Processing fees: It is a maintenance & administration fee varying between 0.5% and 2.50% charged by banks while processing a loan.
  • Verification charges: To check the loan repayment capacity of the loan applicant, the bank usually hires a third-party agency for verifying the credentials. This extra cost is borne by the applicant.
  • Penalty on late EMI: When a borrower fails to repay the EMI on time, a penalty is imposed on him.
  • Penalty on prepayment or foreclosure of loan: In case of prepayment or foreclosure of a loan before the stipulated tenure the bank might charge a penalty at the rate of 2% to 4% on the borrower.
  • Fees for duplicate statement: A bank might charge a fee of Rs.200 and Rs.500 for generating a duplicate statement of the payment schedule and outstanding loan balance.

Your CIBIL Score for Personal Loan

Your CIBIL Score for Personal Loan enables you:

  • To know your credit status
  • To get twice or even three times higher loan eligibility
  • To get a loan at a lower interest rate
  • To get instant personal loan for a longer duration
  • To get a loan with minimum paperwork
  • To get fast processing & quick loan approval
  • To get easy loan approval on rented or leased properties like homes, commercial complexes, apartments, etc.
  • To have a higher negotiation authority to bring down your interest rate, customize your loan payment tenure or ask for other benefits of personal loan and privileges

Calculate Your Personal Loan EMI

The formula used to calculate EMI on personal loan is:

EMI = [P x R x (1+R) ^n] / [(1+R) ^ n-1]

Where P= Principal loan amount
R= Rate of interest &
n= Number of monthly installments.

For example:
Let us assume, P= Rs. 3 lakh, R= 15 percent per annum= 15/12= 1.250 per month, N= 60 months then,
EMI = [300000*1.250/100*(1+1.250/100) ^60]/ [(1+1.250/100) ^60-1] = Rs. 7,137

Prepayment of Personal Loan

Prepayment refers to paying off your personal loan before the designated repayment tenure ends. It helps the borrower save on the interest compounded on the principal loan throughout the repayment tenure. It also enables the borrowers to successfully clear the debt and free up his/her finances.

Personal Loan Tenure

Personal Loan tenure may vary from a minimum of 12 months to a maximum of 84 months depending on the borrower’s income, credit history, etc.

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    The contents of this article/infographic/picture/video are meant solely for information purposes and do not necessarily reflect the views of Bank of Baroda. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Bank of Baroda and/ or its Affiliates and its subsidiaries make no representation as to the accuracy; completeness or reliability of any information contained herein or otherwise provided and hereby disclaim any liability with regard to the same. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Bank of Baroda or its affiliates to any licensing or registration requirements. Bank of Baroda shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

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Types of Personal Loans in India

Loans fulfil quick cash requirements and are thus anyone’s best financial friend in times of need. With skyrocketing prices and limited income, it's hard to save from your earnings or make short-term financial investments. So, where do you find funds when you need them immediately? Several types of personal loans are first partner of choice for emergencies and money management mantras for smart spenders. Taking loans are not a bad habit if you can repay timely in disciplined manner.

Smart Ways to Calculate EMI on Personal Loan

A personal loan does not require the borrower to provide collateral and so it is an unsecured loan. Since these are unsecured loans, the rate of interest on these loans are believed to be quite higher than all other types of loans. The purpose or intention of a personal loan is to fund immediate financial contingencies. It could either be for business capital, marriage, education or even foreign trips, though the end use of the loan really depends on the borrower, as long as it is for a legitimate financial need.
Before you apply for a Personal Loan, you may want to get down to the basics, to shop for the best offers on personal loans in the market. Among the most popular ones is the Bank of Baroda’s Personal loan product which apart from having the pedigree of belonging to one of the oldest and largest Indian banks, comes replete with some amazing features like flexible repayment options, affordable EMIs (Equated Monthly Instalments) that sit easy on your pocket and sizable loan amount among others in the category of personal loans.
Calculating the EMI on personal loans
The EMI calculations mainly rely on three variables- the loan term or the tenure of the loan, the loan value and the rate of interest. The rate of interest is one of the aspects that comes determined by the bank.
Calculating using the PMT formula
This is a longer, tedious and round about approach to calculating the EMI on your personal loan. Here, you can run the PMT formula on Microsoft Excel to calculate the EMI, where

PMT is your EMI,
NPER or number of periods is the total number of payments for the loan
PV is the loan value or the principal
Rate is the rate of interest/12
The formula is
PMT (Rate, NPER, pv).

You can keep trying the formula for various combinations and then choose the one with the lowest EMI, though this is a roundabout approach that could be prone to human error.
Online EMI Calculator
Or a far easier option to calculate the affordable EMI, is using, for example, Bank of Baroda’s online personal loan EMI calculator.
Here, you will find a slider on the range of each of the three basic variables on your screen- the loan amount you are likely to need, the tenure or the repayment period of the loan that suits your finances and the rate of interest.
Now, the rate of interest is what you get from the bank, while the other two aspects, i.e., the loan amount and the tenure of the loan are the ones you can play around with here.
When you place the cursor on a particular value of the loan term, rate of interest and loan amount, the calculator throws up a monthly payment value, which is your EMI. You can move the cursor horizontally along the range provided to pick the various values.
Here’s why using a Bank of Baroda personal loan EMI calculator works.
If EMI is too high

You can pick a longer loan term or
You can make the loan amount smaller.

If you find the EMI is affordable or even lower than ideal then you can plan to repay faster by either

Taking a larger loan value or
A shorter loan term.

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