Personal loans are a great way of buying what you need today and taking care of the payments later. Fast, secure, and hassle-free, they’re the best source of finance when you’re looking to put some cash in your wallet. And now with the facility to take an online personal loan, your work is a lot easier.
When you’re in a dire situation, you have a couple of choices: you can borrow from friends or family, use your credit card, or take out a personal loan. But what if you don’t want to involve your loved ones or what if you require a sum so large that you couldn’t possibly ask someone to loan you that amount?
What is a Personal Loan?
A personal loan is taken to finance personal expenses like a wedding, travel, home improvement, or any unexpected expenses that might crop up. This loan is sanctioned based on your credit history and ability to repay the debt with your personal income.
When you’re granted a personal loan, you’ll be provided with a certain amount of money for a fixed period of time. An interest component is also applied to this loan, and the principal amount, along with the interest, must be repaid within the loan term or tenure.
Why should opt for a Personal Loan?
If you are looking for a quick source of finance with minimum documentation, then personal loans are your best bet. They also grant you a level of privacy along with the freedom to use the loan as you see fit.
Types of Personal Loans
Unsecured Personal Loan
An unsecured personal loan is the most widely available source of funding and can be used for a variety of reasons. You can use it to fund a holiday, pay for a wedding, clear your debts, or buy appliances for your home.
This type of loan is called unsecured because you don’t have to provide any asset as collateral. This means that the bank does not hold any of your assets as security against the possibility that you fail to repay the loan.
Secured Personal Loan
A secured personal loan is a type of financing option that requires you to submit some form of an asset as collateral.
Due to the fact that your lender has the added security of your asset, this type of loan is generally considered to be a minimised risk investment for the lender, and as a result, they often charge a lower rate of interest.
Line of Credit
A line of credit is different from a standard personal loan, as it does not have a specified time frame in which the loan must be repaid.
Similar to a credit card, you can continue to withdraw money out of your loan account provided that you repay it as and when required, and do not exceed the credit limit.
How Much Can Borrow?
You can avail loans ranging from a minimum of Rs.50,000 to a maximum limit of Rs.25 lakh, depending on factors like your eligibility, credit rating, monthly income, and repayment capacity. Most of the time financial institutions will use a personal loan eligibility calculator to figure out the exact amount they should loan you.
What are the Interest Rates?
The rate of interest for a personal loan not only differs from lender to lender but from person to person based on your credit history, monthly income, and ability to repay the loan.
This rate also depends on things like the amount that you’ve applied for, the tenure of repayment for the loan, and your credit score, which is calculated using your credit report.
Generally, personal loan interest rates range from 14% to 30% annually. In case you happen to be self-employed, the interest rate is usually 1% to 2% higher, and if you’re a government employee, the rates are usually lower.
How Long can I Take To Repay the Loan?
Based on the personal loan finance company you approach, there are a wide variety of loan tenure options, ranging from 12 to 60 months. Of course, your tenure is determined by your preference along with the bank’s conditions for sanctioning the loan.
Most banks provide personal loans for 12 to 60 months and offer easy repayment options to the borrower. The borrowed amount, along with the interest rate, is calculated for the entire tenure of the loan, and an EMI is determined, which the borrower has to pay every month.
You can choose to pay larger EMIs, and close your loan as quickly as possible, or opt to pay smaller EMIs and pay off the loan over a longer period of time. You can use this flexibility of choice to calculate an EMI amount that works best within your monthly budget.
A few personal loans also come with a prepayment clause, and you may need to watch out for it.
There are times when you may have some extra cash in hand. If you do, you can choose to pay off a part of your personal loan amount, which would not only reduce your EMI, but also help you clear your personal loan quickly.
Various lenders have their own terms in this regard. Just ensure that you’ve conducted a thorough research so that you aren’t affected by any hidden costs.
How can I Repay My Personal Loan?
You can repay your loan in the form of EMIs (Equated Monthly Instalments) by giving Standing Instructions (SI) to transfer the amount from your salary bank account on a fixed date every month. You may also find a lender who offers you the possibility of prepayment, which allows you to repay the loan quickly.
What is Prepayment?
You can choose to pay off your loan ahead of time with the option of prepayment. However, keep in mind, that some banks have hidden charges if you decide to do so. Certain institutions also mandate that you repay a lump sum only 12 months after you’ve borrowed the loan, or after paying 12 EMIs.
What is the Eligibility for Borrowers?
Anyone with a regular salaried account can apply for a personal loan, which includes employees of MNCs, public and private limited companies, and government sector employees. You can also ask for a loan if you’re a self-employed professional. But there are a few things you need to keep in mind.
- Minimum age of applicant must be 21 years
- Maximum age of applicant at loan maturity must be 60 years
- Minimum monthly income must be Rs.15,000
Banks often have special schemes and offers for personal loans taken by doctors, chartered accountants, and architects. The eligibility criteria differ slightly based on whether you’re self-employed or receiving a regular salary.
Greater Control Over Monthly Payments
Most personal loans come with a fixed rate of interest, which means that your EMIs will remain the same throughout the tenure of your loan. This means, that irrespective of the amount you borrow or the time you choose to pay it back, there will be no surprises during the loan term. Keep in mind, however, that lenders are authorised to increase the rates if there’s a sharp hike in prices.
You could also opt for flexible personal loan interest rates, which fluctuate with the market prices. While this may seem like a risky offer, you’ll have the benefit of lower interest rates when the market takes a hit.
So if you find yourself in a cash crunch where you need quick funds, you have the option of taking a personal loan. It’s guaranteed to make your borrowing process smooth and light on your wallet.
What do Lenders Look for Before Sanctioning a Loan?
Lenders look at your annual income, current loans, credit history, work profile, and your company profile when you apply for a personal loan. Since it’s generally an unsecured loan, lenders also take special effort to gauge your ability to repay a loan by looking at your credit score.
What Documents Do I Require to Apply For A Loan?
Apart from the basic application form and a passport-sized photo, most lenders will require proof of identity, address proof, bank statements for the last 3 months, and your credit report. If you’re self-employed, you’ll also need to show your ITR statements for the last 6 months to be eligible for a loan.
How to apply for a loan?
Before applying for a loan, there are certain factors you need to examine.
1) Everything depends on your credit score, so that must be the first thing you check to see if you qualify for the loan and what your interest rates will be. You can easily calculate your eligibility using the various online portals. Just fill out all your details and specify the loan amount you want to borrow along with your preferred tenure to repay it.
2) Depending on your credit history and relationship with other lenders, your interest rate will be determined.
3) Apply for the loan and complete your application by submitting all the necessary documents.
4) Once your loan has been approved, you need to wait for a few working days for the money to be credited your account.
Now that you have all the information you need to take the right decision, utilise this nifty financial tool to take care of your necessary expenses.