When you are in need of money and want it quickly, a personal loan is the easiest to access as it is sanctioned in a short time. A personal loan is easier to take because it does not require the borrower to put up collateral as other kinds of loans do. The paper work required is also limited as compared to the paper work required for other loans.
Terms and conditions
The terms and conditions of a personal loan are harsher. The interest rate is also higher. This is because a personal loan is an unsecured loan. An unsecured loan is one, where no collateral is put up.
All lenders will charge you a processing fee. This is a one-time charge laid by the lender on the borrower. It covers the administrative charges of the lender. It also covers the charge of checking your credit score which is outsourced to a third party. It is outsourced so that the checking is impartial. It is considered fair and impartial when the credit score does not favor either the lender or the borrower.
The lenders do not charge the processing fee upfront. Generally, they deduct it from the loan amount before releasing the required sum to the borrower. If you plan to use every penny of the loan for purpose you are borrowing, it will be helpful to remember this aspect of charges. The sum of the processing fee should be calculated and added to the sum you need before applying for the loan. In this way you will not face a shortfall in the sum you want. You will get in hand the exact sum that you need.
A personal loan also affects your credit ratings if you do not pay your EMI or equated monthly installment on time. If you miss the payment of equated monthly installment completely, your credit rating will take a hit drastically. The impact of a missed equated monthly payment will leave a long-term impact on your credit score.
If a check to the lender is dishonored, the borrower has to be bear fine charged by the bank.
Uses of a personal loan
Aditya Birla Personal loan can be used for any purpose.
- It could be invested in property.
- Business could be expanded.
- Gold and jewelry can be bought.
- Weddings and festivals can be celebrated in grand style.
There is a myriad way in which to spend the money and enjoy it. But when you compute your taxes at the time of paying your advance tax or at the end of the financial year, you are left wondering about the status of your personal loan with reference to filing your income tax returns.
Tax benefits from personal loans
The Indian Income Tax Act allows tax deductions and exemptions under different heads to be made in case you are repaying a loan.
Personal loans help you to tide over financially difficult periods. They also help you in saving income tax. This is applying to personal loan used for buying property. In case you are using the personal loan to expand your business, then too you can get a rebate in income tax.
Personal loans for business expansion
The deduction is not on the loan itself. The deduction is on the interest you pay on the personal loan. This is allowed under section 24 of the Income Tax Act.
If you can show that you have used the personal loan you have taken for your business, then the interest you pay on the loan can be claimed as an expense and therefore tax deduction can be availed. The interest you have paid in a financial year should be deducted from the profit that the business earns, before computing your tax liability. There is no limit to the interest amount on which you can claim as tax deductible expense.
In this way a personal loan taken for investing in your business, earns you a tax benefit.
Personal loans for residential property
It is a difficult situation when you run out of money in the midst of constructing your dream house. You have used up your housing loan and therefore you cannot offer the property you are constructing as collateral to avail further loan. With great trepidation about the rate of interest, you apply for a personal loan and spend sleepless nights worrying about the high rate of interest you will be paying.
You are allowed an income tax deduction to the tune of Rs. 2.00,000 if you are going to be occupying the property yourself. The same rate is applicable if you are going to let out your residential property. This rate is also applicable if your property is deemed to be let out. You have to submit a certificate from the bank from which you have been granted the personal loan stating that the loan was utilised for construction of residential property. The interest that is paid on the loan can be deducted from the Net Annual Value or net income of the property if it is rented out.
The interest you are paying on a personal loan taken for buying property (not constructing it) also carries the same benefits at the same rate.
This tax benefit can also be availed if you have taken a personal loan for renovating your residential property.
These benefits are offered by the government so as to encourage individuals to build or buy their own dwellings. By reducing the tax burden on all tax payers who are already paying a loan and interest on it, the government is guiding the common man on the path to greater ownership of residential property.
As per independent studies, this reduction in payment of income tax has encouraged a greater number of people to apply for loans for this purpose.
Personal loans for buying other assets
Personal loans are often used for buying non-residential property. Jewelry and other assets are also acquired by availing personal loans. Using personal loans for grand celebrations does not get exemption in terms of income tax. Personal loans used in these manners are not productive so far as income tax rebate or exemption is concerned.
Points to remember
All documents concerning the personal loans must be kept safe and handy. They must be produced to get the income tax rebate.
You must also get a certificate from the lender stating that you have availed of a personal loan to qualify for income tax exemption.
Interest rates on personal loans are high but they are offset to a certain extent by the income tax rebate that is offered to citizens of India.