What Is a Personal Loan?

A personal loan is therefore a form of an unsecured loan that a lender advances to a borrower for his or her own needs. This is unsecured by any form of an asset like a house or car and is usually repaid with interest for a certain number of years.

What to Know Before Applying for a Personal Loan?

Meaning: A personal loan is a lump sum of money borrowed from a lender, which can be used for various personal purposes, such as:

• Medical emergencies
• Wedding expenses
• Home renovations
• Education fees
• Travel
• Debt consolidation

Types of Personal Loans:

1. Unsecured Personal Loan: This credit product is not backed with any form of guarantee and is given depending on the applicant’s creditworthiness.
2. Secured Personal Loan: This type of loan is usually issued under security, for example, a house or a car, and comes with a lower interest rate.
3. Fixed-Rate Personal Loan: Fixed interest rate loan; Fixed repayment schedule.
4. Variable-Rate Personal Loan: This type of loan attracts an interest rate that is not fixed and can, therefore, vary within an agreed-upon period.
5. Payday Loan: This kind of loan is normally a small amount of cash advanced to the borrower to cover an exigent need and paid back as soon as the borrower receives his or her paycheck.
   Benefits of Personal Loans:
6. Flexibility: They are appropriate where the borrower has a particular plan on how to utilize the cash that he intends to borrow.
7. Easy Application Process: The process of obtaining personal loans often does not take long; it is quick to complete an application.
8. Fast Disbursal: Personal loans can be provided very fast, within one day – 24 hours.
9. No Collateral Required: Personal unsecured loans do not involve the pledging of any asset.
10. Fixed Repayment Schedule: Personal loans have regular and timely loan repayments to enable a customer to plan for repayment.
11. Lower Interest Rates: Personal loans can turn out to cost less in terms of the interest rate than average credit cards.
12. Debt Consolidation: One of the uses of credit personal or otherwise is to consolidate other loans and make the financial statement neater.
13. Improved Credit Score: Payment of a personal loan on the due date will be favorable in enhancing their credit score.

Here’s how a personal loan works in 5 points:

1. Application and Approval: A personal loan is a type of loan you get from a lending firm by filling out a form and supplying various personal and financial details. The borrower assesses your credit history, approves your credit application, and sets the amount, interest rate to be charged and the time to be taken for repayment.
2. Disbursal: Once you secure your loan, the lender releases your money to your bank. Depending on the lender’s processing, this can happen within a few hours or days.
3. Repayment: You pay back the principal amount plus the interest in equal monthly installments (EMIs) as agreed on during the repayment period. The repayment period may span up to 12 months on the end and up to 60 months, and beyond on the other end.
4. Interest Charges: The interest may be of two types-fixed or floating, depending upon the agreement between the lender and the borrower. The interest rate varies with other parameters such as credit score, requested loan amount, and the required repayment period.
5. Loan Closure: After you make payment in full, the loan account is said and shut down while you receive a confirmation of closure of the loan account. Repayment history is also another factor and a good repayment plan will also help boost the credit rating.

Here are 5 places to find a personal loan:

1. Banks: Other large banks such as HDFC, ICICI, and SBI provide personal loans with good interest rate charges and manageable repayment schedules.
2. Non-Banking Financial Companies (NBFCs): Top NBFCs such as Bajaj Finserv, Tata Capital, and Aditya Birla Finance provide personal loans and have a simple application method and faster disbursal.
3. Online Lenders: Some instant loan app includes Paytm, Lendingkart, and Faircent and these type of lenders provide personal loans without much paperwork and fast approval.
4. Peer-to-Peer (P2P) Lending Platforms: Some of the P2P lending marketplaces, Lenden, RupaiCircle, and Cashkumar, facilitate borrowers to directly meet individual lenders that provide personal loans at comparatively reasonable interest rates.
5. Credit Unions and Cooperative Banks: Saraswat Bank and Abhyudaya Co-operative Bank are some of the few credit fraternities such as credit unions and cooperative banks that provide personal loans preferably at a lower cost of borrowing and flexible rate of installment.

Here are the differences between a cash advance loan and a personal loan in 5 points:

1. Purpose: A cash advance loan is borrowed for a period of up to 14 days; on the other hand, a personal loan is taken with a term of up to 5 years.
2. Interest Rate: The interest rates of cash advance loans are way much higher as compared to the interest rates of personal loans, the former having an APR from 300% to 700%, and the latter having an APR from 10% to 36%.
3. Repayment Term: Unlike cash advance loans where you incur very high fees and need to repay the amount within weeks or a few months, a personal loan takes a very long period to be repaid; it may take between 12 and 60 months.
4. Loan Amount: Cash advance loans are given in limited and slightly higher amounts than those of personal loans, and the latter are issued in amounts varying from ₹ 50 000 to ₹ 500 000 or more.
5. Fees: As for the fee aspect, cash advance loans may have higher; fees like origination fees, late payment fees, and NSF fees, while personal loans have lower fees; the advantages of which include the origination fees and late payment fees.

Here are 5 points to help you get approved for a personal loan:

1. Check and Improve Your Credit Score: Having a good credit score will help you to have a higher chance of being approved to secure a personal loan. A credit score should, therefore, be anything above 700.
2. Meet the Lender’s Eligibility Criteria: Check for the set age or income requirement by the lender as well as other requirements such as employment status as well as credit score.
3. Gather Required Documents: First, you need to have all your documents in order ID proof, address proof, income proof, and bank statements.
4. Choose the Right Lender: Different lenders offer their money at different rates, depending on many factors including the current market price, their ability to recover on any loan given out, and other related factors.
5. Submit a Complete and Accurate Application: Complete the loan application form to the best of your ability and make sure to include all relevant information as well as documents. This will assist the lender in approving your application quickly and efficiently.

Do personal loans have fees?

Of course, the personal loans can come with different additional charges which in turn will be added to the expected cost of the loan. Here are some common fees associated with personal loans:

1. Origination Fee: A charge made by the lender for accepting to process the loan application; often it falls between $100 and 6% of the loan amount.
2. Interest Rate: The rate at which the lender charges the loan amount for a loan ranging from the date of approval of the loan amount to the due date of the loan.
3. Late Payment Fee: Late payment fee or a fee levied for a payment default which can vary between ₹500 to ₹1000 or even higher than that.
4. Prepayment Fee: An additional amount, which the borrower is charged when he severs his relationship with the lender early before the due repayment period which is usually between 1% and 4% of the total loan amount.
5. Processing Fee: A cost incurred by the loan provider in conducting an application for a loan which is normally within ₹1,000 to ₹5,000 or even more.
6. Documentation Fee: A charge levied on the borrower for drawing and preparing the loan papers; usually between ₹500 and ₹2000 or more.
7. Cheque Bounce Fee: An upfront fee paid by the borrower in case the borrower’s cheque bounces normally ranging anywhere between ₹500/- ₹1,000/- or more.
8. Loan Cancellation Fee: A charge that the borrower pays when he chooses to cancel the loan application or loan agreement, which may cost between ₹1,000 to ₹5,000 or more.

To give you a better idea, here’s an example of the fees associated with a personal loan:

Loan Amount: ₹1,00,000
Interest Rate: 12% per annum
Repayment Term: 12 months
Origination Fee: 2% of the loan amount which is 2,000.
Processing Fee: ₹1,500
Late Payment Fee: ₹500
Prepayment Fee: It makes itself appropriate by paying 2% of the outstanding loan amount which equals ₹ 2000.

In this example, the total fees associated with the personal loan would be ₹6,000 (₹2,000 + ₹1,500 + ₹500 + ₹2,000). This is in addition to the interest charged on the loan amount over the repayment period.

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