Here is Your Guide to Personal Loans

Updated on: 19 Jan 2024 // 5 min read // Personal Loans
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A loan is essentially a sum of money that you borrow from a friend, family or a financial institution such as banks, a non-banking financial company (NBFC) or an online lender.

A Personal Loan is a type of loan, which allows you to procure the required funds from a bank or lender to be used for any purpose you deem fit. Of course, if you are new to the world of finance, even something as simple as a Personal Loan can seem to be overwhelmingly extensive to understand. However, you need not worry as we have prepared a comprehensive guide to personal loans, just for you.

Personal Loan – Definition

A Personal Loan is an unsecured credit which helps you borrow a certain amount from your bank or online lender. The loan is offered for a stipulated time period and at a fixed rate of interest. Once procured, the loan must be repaid in the form of equated monthly instalments(EMIs), throughout the tenure.

Personal Loan -Interest Rate

Given that this type of loan is unsecured in nature, and doesn’t need you to put up any collateral, banks run a risk of losing out on the money if you default. In order to recoup the losses, if any, banks offer this loan at a fairly higher rate, as against secured credit types such as Home Loans or car loans. In most cases, Personal Loan interest rates range between 11-22%. The actual interest rate that will be charged from you will depend on numerous factors including but not limited to:

  • Your Credit Score: This factor has the largest impact on the determination of the interest rate that you ought to pay on your loan. The higher your credit score (750 or above), the lower will be the interest rate.
  • Your Age: The lower your age (in the bracket of 21-65 years), the more favourable is the interest rate.
  • Your Employment History: The stronger your employment history, the better will be your chances of qualifying for a low-interest rate.
  • Your Income: The higher your income, the better it will be for you when it comes to procuring a reasonable rate of interest.

Personal Loan – Tenure

You can get this loan for a minimum period of 1 year, and a maximum period of 5 years. In some special cases, your bank might extend the period up to 7 years. Since you will be required to repay the loan in as little as 12 to 60 EMIs, it is important for you to understand that the amount per EMI could be rather high, depending on the loan amount.

Personal Loan – Amount

When applying for a Personal Loan, depending upon your goals, and your ability to repay the loan, you can place a request for any loan amount ranging from 50,000 to a whopping 50Lakhs.

Personal Loan – Approval

Once you apply for a Personal Loan, along with all the requisite documents, and pass the eligibility criteria of the lender, you may expect to get an approval for the same within a days’ time. This is to assure you of the fact that this loan can come in handy in case of emergencies when you need quick access to a hefty sum of money.

Personal Loan – Additional Charges

When a bank offers you with a personal loan, it usually levies a processing fee, which may range from 1% to 2.5% of the loan amount. Other charges imposed by lender usually include a prepayment penalty, wherein you will be required to a pay a penalty, in the form of a small percentage of the outstanding loan amount, if you choose to pay off the loan before the end of your tenure.

Personal Loan – Objective

As indicated by its very name, a Personal Loan can be used for any object that is largely personal in nature. Neither do you need to specify the reason for borrowing this loan amount, nor does the lender have any right to ask for or direct the use of this amount. More often than not, borrowers use a Personal Loan for:

  • Renovating the house
  • Buying gadgets and appliances
  • Sponsoring the education of their child
  • Meeting the expenses of a wedding
  • Expanding the business
  • Consolidating Credit Card Debt
  • Paying medical bills
  • Traveling

While there are no restrictions, whatsoever, on how you wish to use the procured loan amount, it is strongly discouraged that you put it towards entertainment or investment purposes. After all, it is a form of credit, and even if you lose it or spend it on non-urgent purposes, you will be required to repay the same, complete with the interest.

When to Take a Personal Loan?

It is exceedingly simple to apply for a Personal Loan online and to get it approved. However, that doesn’t necessarily mean that every time you need some money, you end up taking this seemingly convenient credit. You should only take this loan under the following circumstances:

If you can afford the loan, that is, if you can repay the EMIs comfortably without adversely affecting your quality of life, or enduring immense financial burden.

If you truly need it, that is, if you wish to spend the money on a life goal such as education or wedding, or an emergency such as severe illness or accidents. Spending borrowed money on luxuriant aspects such as gadgets, frequent vacations to abroad, and gambling is a strict no-no.

If you do not have any other alternative available. If you need a comparatively small amount of money, say, 50,000 or 1 Lakh, chances are a friend, a family member or even your employer may lend it to you. In this case, you can take the money for a month or two or even more, without the need to pay a hefty interest rate. Moreover, you can pay on your own accord, without letting your credit score suffer. Hence, look out for other options. Only if you find nothing cheaper or more beneficial should you go for a formal credit.

If you have a high credit score. As mentioned earlier, the lower your credit score, the higher will be the interest rate your loan will attract. To save yourself from this added burden, make sure you only apply for this credit if your score is at least 750 or higher.

We hope that you now have a much clearer picture regarding a Personal Loan, the aspects related to it, and whether you should or shouldn’t opt for it. If you still need any more information on the subject, feel free to get in touch with your trusted financial advisor, or your bank!