Personal loans are traditionally regarded as a borrowing of the ‘last resort’. This is largely true. The interest rates on personal loans exceed most other types such as housing loans or loans against shares. This is because personal loans are not backed by any specific assets. Their repayment depends entirely on how creditworthy you are. However, there is some silver lining to this scenario. Personal loan interest can get you two tax benefits.
- If you use the money for your business
The interest on the loan can be claimed as a business expense and thereby be used to reduce your income tax liability.
- If you use the loan for the construction/repair/renovation of your house
In this case as well, under Section 24B of the Income Tax Act, the interest on the personal loan is deductible from your taxable income up to amount of Rs 2 lakh. This limit now applies irrespective of whether the house is self-occupied or rented out.
Interest Rates on personal loans with major banks:
|Bank||Personal Loan Rates|
|State Bank of India||11.6% – 15.10%|
|HDFC Bank||14.75% – 20.7%|
|ICICI Bank||10.99% – 22%|
|Axis Bank||15.5% – 24%|
|Kotak Mahindra Bank||10.99% – 24%|
These rates vary according to your credit score and background. You can find out how to improve your credit score here. In terms of background, if you have a steady, high-paying job in a well-established company they will be lower. If you are self-employed with irregular work, these will be higher.
The documents needed to obtain a personal loan are relatively fewer than for other types of loans. You have to provide the bank with proof of ID and address such as Aadhaar card, Passport and utility bills. In addition, you have to submit proof of income such as salary slips, employment certificates and income tax returns.
In the past few years, alternative sources of finance have emerged for these types of loans like peer-to-peer lending websites. We tell you about them here.