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What are Personal Loans All About? How do They Work?

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What are Personal Loans All About? How do They Work?

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We all know what loans are, right? Now, when the bank lends you money for personal needs like taking a holiday, or paying your medical bills, it’s a personal loan. While availing  these is easy, there are certain benefits and trade-offs associated with a personal loan. Let’s check out all that you need to know about personal loans.  

What is a Personal Loan?

A personal loan is money borrowed from a bank, NBFC or any other financial institution for a pre-given period of time. This borrowed sum has to be paid back in regular monthly installments ,within this decided repayment tenor which can range from 12 to 60 months. 

You will also have to pay a certain interest on the borrowed sum. Depending on the lender you pick and your credit profile, the applicable rate of interest can range from 8.90%-49%.  Unlike a car or home loan, a standalone personal loan is unsecured. This means that you won’t have to put down collateral to avail of the loan. Since the risk of sanctioning a personal loan is greater for the lender, the interest rate tends to be on the higher end.

How Does a Personal Loan Work?

Once your loan application is accepted, you can withdraw the entire loan amount or make small withdrawals as per your needs. However, it should be noted that monthly EMI payments for the loan will start from the month following its disbursement. 

What Can I Use a Personal Loan For?

As the name suggests, you can use a personal loan to finance your personal needs. There aren't any end-use restrictions when it comes to personal loans. In other words, you can use the sanctioned loan amount as per your needs. 

How To Know If I Qualify for a Personal Loan?

While NBFCs and banks offer easy personal loans, there are still certain eligibility criteria you must meet to qualify for such loans. While this list varies from one lender to the next, here’s a brief overview of eligbility - Age: Most lenders issue personal loans to applicants aged 21-65 years. Some lenders fix the minimum age slab at 18.

  • Monthly Income: While this estimate will vary across lenders, it is usually set at ₹15,000 for salaried applicants and ₹25,000 for self-employed individuals. 
  • CIBIL Score: A good credit score is a prerequisite for a personal loan. Generally, a CIBIL score of at least 750 is considered best for such loans. However, you can apply and avail of a personal loan even if you have a poor credit score. The terms & conditions will vary though.

What Documents Will I Need to Apply for a Personal Loan?

To apply for a personal loan, you will require the following set of documents:

  • Identity proof like Aadhaar Card, PAN Card, Voter’s ID Card, etc. 
  • Address proof like utility bills or municipal tax receipts. 
  • Income proof like salary slips, IT returns and bank statements.

Where Can I Get a Personal Loan?

With the easy availability of credit today, you can avail of personal loans through traditional offline and modern online channels.. Ideally, you should start looking for a personal loan from your current bank or NBFC. 

Lenders often extend pre-approved loans with preferential rates to their loyal customers. You can check with your current lender to see if you qualify for any such offers before looking for a personal loan elsewhere. Doing so will also help you save time on submitting extra KYC documents and waiting through the verification stage. 

How to Apply for a Personal Loan?

With the growing demand for such loans and the advancement of technology, applying for a personal loan has become relatively easy. 

How to take a personal loan offline:  

  • Visit the bank/NBFC branch office.
  • Inquire about the types of personal loans offered.
  • Fill out the personal loan application form with relevant details. 
  • Submit the documents listed like your ID, address, age and income proofs. 
  • Wait for the lender to verify the documents and get back with an offer. 

While traditional offline channels may still exist, applying for a personal loan online is definitely more convenient. You don’t just get to ditch the chore of visiting an offline branch office but also enjoy the convenience of a paperless documentation process. 

How to get a personal loan online:

  • Visit the bank/NBFC’s official website/app.
  • Click on the ‘Personal Loan’ tab.
  • Select the ‘Apply for a Personal Loan’ option and fill up the loan application form.
  • Scan and upload all the relevant documents. 
  • Sit back and wait for the lender to verify your details and get back with an offer. 

To make things easier, our EMI calculator will show you exactly how much you need to repay every month, depending on the loan amount, tenure and interest rate.

What Should I Do Before Applying for a Personal Loan?

  1. Compare Interest Rates 
  2. Review the Document list and Eligibility Criteria 
  3. Check Your Credit Score
  4. Take All Costs into Account
  5. Ensure That You Have a Proper Repayment Plan 

Frequently Asked Questions 

1. What is the meaning of a personal loan?

A personal loan is a loan taken from a bank or NBFC to meet personal needs. This amount is borrowed for a certain predetermined period against an applicable interest rate and must be paid back in monthly instalments within this tenor. Most personal loans tend to be unsecured with no collateral requirements. 

2. What are some examples of personal loans?

Loans taken to fund weddings, travel, medical emergency or home renovation expenses qualify as examples of personal loans. Similarly, those taken to meet higher education expenses or purchase customer durables or gadgets also qualify as personal loans. 

3. What is a personal loan called?

A personal loan is often known as a consumer loan as the loan amount can be used at the discretion of the borrower

4. What is the risk of a personal loan?

The chief risk associated with an unsecured personal loan is that defaulting on such loans can severely damage your credit score. Such damage to your credit score can make it difficult to secure loans in the future.

5. What is the benefit of taking a personal loan?

Personal loans have several benefits. First, by applying for an unsecured personal loan, you can enjoy freedom from the need to put down an asset as collateral. Second, most lenders now approve such loans in a matter of hours. Third, the document checklist for such loans is also basic because of the simplistic eligibility criteria. In other words, you can apply for a personal loan with minimum documents. And lastly,  there’s no cap on how to use the funds

6. What will happen if I stop paying my personal loan?

If you stop paying your personal loan EMIs, you will have to face penalties ranging from 2%-5% of the outstanding loan amount. If you eventually default on the loan, the lender will report you as a defaulter resulting in a severe blow to your credit score.

7. Can you return a personal loan if you don't use it?

No. A personal loan can only be cancelled before the sum is disbursed and deposited into your account. However, once the money has been deposited, you cannot return it. The only available option then is to prepay the loan with an add-on penalty. 

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