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Looking for financial help? A personal loan can be the solution. Understand it in detail and find out why it is an ideal solution for all financial needs.
A personal loan often helps borrowers meet financial emergencies. Unlike home or car loans, individuals can use the loan amount for multiple purposes.
Learn about this loan in detail here before applying and make informed decisions.
What Is the Meaning of a Personal Loan?
A personal loan is an unsecured loan offered by financial institutions without collateral.
Financial institutions grant personal loans based on the borrower's repayment capacity, employment history, profession, income level, and credit score.
As a borrower, you can use personal loans for various purposes, as there is no specific underlying purpose to apply for these loans.
Is a Personal Loan Good or Bad?
A personal loan helps you get a lump sum, ensuring easy funding during financial emergencies.
It provides financial assistance without any collateral, wherein the personal loan rates remain fixed.
However, the repayment tenure is often shorter compared to other loans, and penalties may apply for late payments, foreclosure, or prepayment.
Unlike credit cards, you must repay the entire borrowed amount over the loan term. While it offers flexibility, the associated costs and conditions require careful consideration.
Based on your needs, you can choose to opt for personal loans online.
How Do Personal Loans Work?
The steps below illustrate how a personal loan works:
Step 1: You have to apply for a personal loan.
Step 2: You need to submit the necessary documents that the lender asks for.
Step 3: The bank or NBFC will check your creditworthiness and offer you the loan.
Step 4: On acceptance, the loan amount will be disbursed into your bank savings account.
Step 5: You can use the funds for any purpose based on your requirements.
Step 6: Ensure you repay the loan with interest in EMI (Equated Monthly Instalment) per month. The EMI amount depends on the total loan amount, interest rate and repayment tenure.
Examples of Personal Loan
A debt consolidation loan is an example of a personal loan, where you can merge multiple debts into one in order to simplify repayment.
For instance, instead of managing an education loan (₹10,00,000 at 9%), a home loan (₹50,00,000 at 8%), and a car loan (₹5,00,000 at 10%), totalling ₹65,00,000, you could consolidate them into a single personal loan at 8.5%.
Which Bank Is Best for a Personal Loan?
There are several banks and non-banking financial companies (NBFCs) offering personal loans to Indian borrowers.
Certain factors that determine if a personal loan from a particular financial institution is suitable for you include the interest rate, loan tenure, loan amount, processing fee, foreclosure or prepayment charges, and penalty for delayed payment.
The interest rate on personal loans varies between banks and NBFCs. A higher interest rate indicates a higher loan repayment amount.
In addition, certain banks or NBFCs might charge a higher processing fee, foreclosure or prepayment charge and late payment charge.
Based on the borrower's capacity to repay, he/she can choose any bank or NBFC that suits the purpose.
Furthermore, the borrower needs to choose a financial institution that would grant him/her the required loan amount based on his/her profession, income and credit score.
If all the factors are convenient, choosing a financial institution with minimal documentation needs and disbursal time can help borrowers receive funds seamlessly.
How Long Is a Personal Loan For?
Usually, banks and NBFCs provide personal loans for a maximum tenure of 5 years.
Borrowers can choose a repayment tenure between the minimum and maximum available options, depending on their repayment capacity.
Certain financial institutions offer shorter repayment tenures, such as a few months, for smaller loan amounts.
This flexibility allows borrowers to choose a tenure and lender based on their specific financial situation and convenience.
What Are the Benefits of a Personal Loan?
Here are the benefits of a personal loan that you need to know:
- Minimal Documentation
Personal loan applications and sanctions require minimum documentation, unlike gold or home loans.
As a result, by presenting documents like income proof and employment proof, borrowers can easily apply for personal loans.
- Fast Disbursal
If the lender is satisfied with the repayment capacity and credit score of the borrower, they often disburse personal loans within a short time period.
In addition, the availability of online services for personal loans makes it a faster process to disburse this loan.
- Flexible Loan Tenure
Usually, lenders allow borrowers to choose a flexible repayment tenure. This tenure might range between 1 year and 5 years based on the lender’s terms and conditions.
A shorter tenure chosen by the borrower helps him/her pay interest for a shorter duration.
How Do You Get Personalised Loans?
You can get personalised loans if you follow the factors mentioned below:
- Improve Your Credit Score
A credit score is an essential criterion to secure loans. A high credit score indicates the borrower's creditworthiness, and lenders might offer lower interest rates based on high credit scores.
Maintaining a credit score above 750 can help you get personal loans seamlessly, with the possibility of getting them at a lower interest rate.
- Avoid Missing Repayments
Timely repayment of existing loans and credit card bills positively impacts the credit score of borrowers.
In addition, a good credit score can help you get a loan at a lower interest rate. Ensure you avoid missing repayments of your existing loans and credit card bills.
Lenders often check your credit history before they sanction a loan.
- Compare Interest Rates
As the interest rates offered by banks and NBFCs on personal loans differ significantly, it is essential for borrowers to compare the rates before applying with a particular financial institution.
It can help borrowers secure loans at a competitive rate to lower the total interest amount payable.
- Keep Track of Offers
Financial institutions often provide loans at lower interest rates during festivals or occasions.
Keeping track of these offers can help you apply for a personal loan with a lower interest rate. Tracking the offers can further help you get pre-approved loans based on your eligibility.
Final Word
A personal loan serves various purposes, helping you address financial needs promptly.
Medical emergencies, weddings, vacations, home renovation, and debt consolidation are some of the common reasons for taking personal loans.
Based on your requirements and repayment capacity, you can take this loan from a financial institution offering a competitive interest rate.
One such option is to get an instant personal loan of up to ₹5 lakh with Jar.
