Question 1

What are personal loans?

Accepted Answer

Personal loans, as opposed to business or commercial loans, are loans that banks or other lending institutions provide to individuals. The money from personal loans can be used for a variety of reasons, which is not the case for specific loans such as a home loan, car loan or education loan.

Personal loans are also different from credit lines in the way money is lent. A personal loan is disbursed by a lender in the form of a lump sum amount that is typically deposited directly into your bank account. On the other hand, credit lines such as a credit card, represent a continuously open line of credit that can be used on a recurring basis, usually in smaller amounts than a personal loan.

Furthermore, there are two types of personal loans - secured loans and unsecured loans. A secured loan is backed by an asset such as your house or car which is given as collateral. In case you default on your loan repayment, the lender can take possession of this asset to recover its dues.

Unsecured loans, as the name suggests, are not backed by any collateral. Unsecured loans usually come with a higher rate of interest since they are considered riskier for a lender. Also, it might be harder for you to get an unsecured loan if you don’t have a credit history or you don’t have a strong credit score.

Question 2

Why use personal loans?

Accepted Answer

Since personal loans are not tied to any specific use or purchase, they can be used for a number of reasons. These can include any large expenditure that you may need to undertake but don’t currently have the cash for. Maybe your house is in dire need of repairs or renovation. If you’re planning on getting married soon, there might be no getting away from that big, fat (and costly) Indian wedding.

Personal loans also come in handy in the unfortunate event that you need to cover a large medical bill for which you are either uninsured or underinsured. If you’ve been waiting for too long for that foreign trip and have been unable to save up, a personal loan can help you with that well-deserved break.

Another reason people may take a personal loan is to consolidate their debt. If you have a number of debts to keep up such as multiple credit card bills or other forms of credit, they each have their own EMI cycles and varying interest charges and it can be easy to lose track. To bring all these different debts, EMIs and interest charges under one loan and a single monthly payment, you can consolidate it under a personal loan.

Question 3

How to calculate a personal loan?

Accepted Answer

Different types of loans have a different set of considerations, yet all loans have three basic factors that interact in different ways with each other to decide how you will repay the loan.

First is the loan amount that you are seeking to borrow. This has a very straightforward relation with the loan period and the repayment amount. A higher loan amount will take longer to repay and result in a higher EMI amount and vice versa.

The second is the loan period. The longer the loan period the lower will be your EMI amount. Also, the longer the loan period, the higher will be the interest amount you pay on the loan.

The third factor is the rate of interest. The interest rate on a personal loan is usually higher when compared to other types of loans like home loans, car loans or education loans.

It also depends on a range of factors such as your credit score and whether it is a secured or unsecured loan. Unsecured loans which do not have any collateral assets backing them have a higher rate of interest. Together, these three factors decide the total amount you have to repay the lender and the EMI amount. Use the Fi Money personal loan EMI calculator to handle these calculations for you so that you can make a more informed decision when it comes to applying for a personal loan.

Question 4

Components of the personal loan EMI calculator

Accepted Answer

Personal loans come in all shapes and sizes but they will all have three basic components - the amount, rate of interest and loan period. Some of these components are in your control while others are decided by the bank or lending institution. The Fi Money personal loan EMI calculator allows you to see how each of these components interact with each other and how that might affect your EMIs. Let’s see what these components are.

Loan amount - This is the first thing you should consider when planning to take out any loan, be it personal or otherwise. It is one of the components that are in your control and the other two components are highly dependent on this factor. The higher the amount, the longer it will take you to repay the loan and vice versa.

Loan period - This is the number of years you will repay the loan and it is another one of the components that you can control. The longer the loan period, the lower will be your personal loan EMI and vice versa. But one important point to remember is that at the same rate of interest, a longer loan period will result in a higher interest amount.

Rate of interest - This is the part of the loan that is not in your control since the lender decides this. It depends on a number of factors like whether you have a credit history, your credit score and whether it's a secured or unsecured loan. Even small changes in the interest rate can have a big impact on your personal loan EMI and total repayable amount.

Once you decide on these three components, the Fi Money personal loan EMI calculator will show you what your EMI amount will be based on this information along with the interest amount, the total amount to be repaid and a loan repayment schedule.

Question 5

How is the personal loan EMI to be paid?

Accepted Answer

When you take a loan from a bank or any lending institution, you agree to repay the borrowed amount along with interest. The total amount repayable is split into equated monthly instalments (EMIs) to be paid over a fixed period of time.

When these details are fixed, the lender will provide you with an amortisation schedule. If you didn’t get that, there’s no reason to panic. Amortisation is a financial term that simply refers to the process of repaying a debt. The schedule will show you all your EMIs through the entire loan term and indicate how much of the loan has been paid off and how much is left with each EMI. It will also show you what part of the total amount you are paying off - interest and borrowed amount.

Typically, you start off by paying more of the interest amount and move on to clear the borrowed amount by the end of the loan duration. It is important to make sure you have the capacity to pay your EMIs regularly. If you happen to miss an EMI, it gets reported to credit bureaus that maintain your credit score, which will have a negative impact on your credit score.

One rule of thumb is to make sure your monthly EMIs do not go over 50% of your monthly income. This can be done easily with a little bit of planning and the use of online calculators like the Fi Money personal loan EMI calculator.