A Complete Guide to Personal Loans in India: 2025 Edition

At its core, a personal loan is an unsecured loan. This is a critical term to understand. “Unsecured” means you do not need to pledge any asset or collateral—like your house, car, or gold—to the bank. The lender provides you the money based on your creditworthiness, which is primarily judged by your income, employment stability, and CIBIL score.

You receive the loan amount as a lump sum in your bank account. You then repay it in fixed monthly payments, called Equated Monthly Installments (EMIs), over a set period (known as the loan tenure). The defining feature is its ‘no questions asked’ policy on usage, allowing you to fund any legitimate personal requirement.

Before a bank trusts you with their money, they need to be confident you can pay it back. Here’s a breakdown of the key eligibility criteria in India:

Credit Score (CIBIL Score)

This is the king of all eligibility factors. A CIBIL score is a 3-digit number ranging from 300 to 900 that summarizes your credit history. A score of 750 or higher is considered ideal by most lenders. It tells them you have a reliable track record of paying back your past debts on time. A lower score might lead to rejection or a loan offer with a much higher interest rate.

Monthly Income

You need a stable and regular source of income. For salaried individuals in metro cities, most banks expect a minimum monthly income of around ₹25,000 to ₹30,000. For other cities, this might be slightly lower. For self-employed individuals, lenders look at your annual business income and profit as per your ITR filings.

Employment Stability

Lenders prefer applicants who have been employed with their current company for at least one year and have a total work experience of at least 2-3 years. This indicates stability and a lower risk of job loss.

Age

The typical age bracket for applicants is between 21 and 60 years. You must be old enough to legally enter a contract and young enough to repay the loan before you retire.

Ever wondered about the magic formula banks use to decide your loan amount? A key metric is the Fixed Obligation to Income Ratio (FOIR), also known as the Debt-to-Income Ratio.

FOIR is the percentage of your monthly income that goes towards servicing existing fixed obligations (like other EMIs for a home or car loan, credit card bills, etc.).

The modern loan application process is largely digital, making it faster and more convenient than ever before. Here’s a detailed walkthrough of what you can expect.

1. Pre-Application Homework: Before you even fill out a form, do your homework. Use online loan calculators to estimate your potential EMI. Check your CIBIL score for free from an official credit bureau website. Knowing your score beforehand gives you a significant advantage.
2. Compare Lenders Diligently: Don’t just go with the first option. Compare interest rates, processing fees, and prepayment terms from at least 3-4 different lenders. Look at both traditional banks and reputed NBFCs.
3. Document Preparation: Gather digital copies (scans or clear photos) of your documents. This is the single biggest step you can take to speed up the process. This includes Identity Proof (PAN, Aadhaar), Address Proof, and Income Proof (Salary Slips, Bank Statements, ITR for self-employed).
4. Filling the Online Application: Visit the lender’s official website or app. The form will ask for your personal details, employment information, desired loan amount, and tenure. Be meticulous and ensure all information matches your official documents to avoid delays.
5. The Verification Process: After you submit the form, the lender’s system will perform an initial check. You’ll likely need to complete a Video KYC (vKYC) where you show your PAN/Aadhaar on camera. The lender will also verify your employment details.
6. Sanction and Disbursal: If all checks are successful, the lender will issue a loan sanction letter. This document details the approved loan amount, interest rate, tenure, and all terms. Read this carefully. Once you accept it by e-signing the loan agreement (using an Aadhaar-based OTP), the funds are disbursed directly to your bank account, often within a few hours.

This is a common point of confusion for many borrowers. Generally, unlike a home loan, you cannot claim tax deductions on the principal or interest paid for a personal loan. The Income Tax Act does not have a specific section for personal loan deductions for general purposes like weddings or vacations.

However, there are exceptions based on the end-use of the funds:

• For Business Expansion: If you use the personal loan amount as capital for your business, the interest paid can be claimed as a business expense under Section 37(1) of the Income Tax Act. This reduces your overall taxable profit. You must maintain clear records, bills, and a bank trail to prove that the funds were used exclusively for business purposes.
• For Purchase or Renovation of a House: If you use the loan for down payment, construction, or renovation of a residential property, you may be able to claim tax benefits on the interest component under Section 24(b). The maximum deduction is ₹2 lakh per year for a self-occupied property. Again, proper documentation proving the fund’s end-use is mandatory.
• For Purchase of Other Assets: If the loan is used to purchase an asset like shares, non-residential property, or jewelry, the interest cost cannot be claimed annually. However, it can be added to the acquisition cost of the asset. This reduces your taxable capital gains when you eventually sell the asset.

Getting the loan is only half the journey. Responsible management is key to ensuring it remains a blessing, not a burden.

The Golden Rule: Never Miss an EMI

Set up an automated ECS (Electronic Clearing Service) mandate or a standing instruction for your EMIs. This ensures the payment is made on time, every time. A single missed EMI can attract hefty penalties (ranging from ₹500 to ₹1000+) and severely damage your CIBIL score for years to come.

Understanding Prepayment

If you receive a bonus or have surplus funds, you can choose to prepay your loan. There are two types: part-prepayment (paying a portion) and foreclosure (paying the entire amount). Note that many banks charge a prepayment penalty, typically 1-5% of the outstanding principal. Weigh the cost of this penalty against the interest you will save before making a decision.

What If You Face Financial Difficulty?

If you anticipate being unable to pay an EMI, do not hide. Contact your lender immediately. Explain the situation transparently. They may offer a temporary solution like a short deferment period or a loan restructuring. Proactive communication is always better than defaulting.

1. Applying Everywhere: Submitting applications to multiple lenders at once results in multiple hard inquiries on your CIBIL report, which can lower your score. Research first, then apply to your chosen one or two lenders.
2. Ignoring the Fine Print: Don’t just look at the interest rate. Read the loan agreement carefully for hidden charges like prepayment penalties, late payment fees, insurance costs, and other clauses.
3. Overborrowing: Just because you’re eligible for ₹10 Lakhs doesn’t mean you should take it. Borrow only the amount you truly need to keep your debt manageable.
4. Choosing the Longest Tenure Blindly: A long tenure means a lower EMI, but it also means you pay significantly more interest over the loan’s lifetime. Calculate the total interest paid before deciding.
5. Ignoring Other Credit Options: A personal loan is convenient but can be expensive. Before applying, consider other options. Could you take a loan against your fixed deposit, PPF, or insurance policy at a lower interest rate?
6. Falling for “Guaranteed Approval” Scams: Be wary of any lender or agent who promises 100% guaranteed approval, especially if they ask for an upfront fee before the loan is sanctioned. Reputable lenders never guarantee approval and never ask for fees before sanctioning.

Can I have two personal loans at the same time?

Yes, it is possible to have two or more personal loans simultaneously. However, your eligibility for a second loan will depend entirely on your repayment capacity. The lender will strictly evaluate your FOIR to ensure you can comfortably service all your EMIs. Taking on too many unsecured loans can be risky, so proceed with caution.

Does prepaying my loan hurt my CIBIL score?

No. On the contrary, successfully prepaying and closing a loan is viewed positively by credit bureaus. It demonstrates strong financial discipline and reduces your overall debt-to-income ratio, which can help improve your credit score over time.

Can an NRI get a personal loan in India?

Yes, some banks and NBFCs offer personal loans to Non-Resident Indians (NRIs), but the eligibility criteria are generally stricter. Lenders often require a resident Indian co-applicant or guarantor. The documentation process might also be more extensive, requiring passport copies, visa details, and proof of overseas income.

What happens to the loan if the borrower passes away?

If the loan is uninsured, the bank will first attempt to recover the outstanding amount from the deceased’s estate (their assets). If there is a co-applicant or guarantor on the loan, they become legally responsible for repaying the outstanding debt. If the loan was insured, the insurance company would settle the outstanding amount.

Is it possible to transfer a personal loan to another bank?

Yes, this process is known as a personal loan balance transfer. If you find another bank offering a significantly lower interest rate, you can apply to them to take over your existing loan. The new bank pays off your old loan, and you then start paying EMIs to the new bank at the lower rate. This is a good way to save money on interest, but be sure to account for any processing fees charged by the new lender.