What is a Personal Loan? All you need to know

In recent times, there has been a significant rise in the popularity of personal loans, as more and more people are taking advantage of this financial instrument to meet their larger expenses. In this blog post, we delve into the topic of personal loans, their features, advantages, eligibility criteria, and application process.

What is a Personal Loan?

A personal loan is an unsecured credit provided by financial institutions such as banks and non-banking financial companies (NBFCs) based on factors like employment history, repayment capacity, income level, profession, and credit history. It is also known as a consumer and multi-purpose loan that can be utilized to meet your immediate financial requirements.

Personal loans can be used for a wide range of purposes. From funding a wedding or a vacation to covering medical expenses to consolidating high-interest debts, their flexibility makes them a popular choice for many borrowers.

Features of Personal Loans

1. Unsecured Loan: Personal Loans are unsecured, meaning they don’t need any collateral like a home, car, gold, etc, to secure the loan amount. This makes them easier for anyone who needs urgent funds.

2. Loan amount: You can borrow as per your requirement, with a minimum loan amount typically starting from Rs. 5,000. The maximum loan amount varies by lender but can go up to Rs. 40 Lakh.

3. Flexible Tenure: Repay the loan comfortably over a flexible tenure of up to 5 years. So, monthly installments are comparatively smaller.

4. Competitive Interest Rates: Enjoy attractive interest rates to make your loan more affordable. Interest rates vary based on factors like credit score, income, and lender policies.

5. Minimal Processing Fee: Most lenders charge a minimal processing fee during loan approval. This fee is deducted from the loan amount.

6. Minimal Documentation: Save time with minimal paperwork requirements. This makes personal loans a hassle-free process.

7. Quick Disbursal: Pre-approved customers of certain banks (like HDFC Bank) can experience disbursals in 10 seconds without any paperwork. Other customers can receive the loan amount within a few hours.

8. Eligibility Check: Use user-friendly eligibility calculators to check if you qualify for a personal loan. These tools provide quick results in just 1 minute.

9. Flexible Use of Funds: Unlike secured loans, personal loans offer flexibility in how you use the funds. You can use the fund for various needs, such as:

• Debt consolidation
• Home Improvement
• Major purchases
• Medical expenses
• Education Expenses
• Special occasions

9. Insurance Options: Some personal loan plans may offer optional insurance add-ons. If the borrower has opted for such insurance, the insured amount can be used to repay the outstanding loan balance.

Also read, Comparison of latest home loan interest rates

Eligibility and Application Process

Before applying for a personal loan, it is important to understand the eligibility criteria set by lenders. While these may vary across financial institutions, some common requirements include:

1. Age: Most lenders require borrowers to be within a certain age bracket, usually between 21 and 60 years.

2. Income: Lenders often have a minimum income requirement to ensure the borrower can repay the loan.

3. Employment Status: Some lenders may require borrowers to be employed with a steady source of income. Self-employed individuals may also apply, provided they can prove a consistent income stream.

4. Credit Score: A good credit score (usually 750 or above) is often a prerequisite for a personal loan. This score, calculated by credit bureaus, reflects a borrower’s creditworthiness based on their past and current credit behaviour.

Applying for Personal Loans

Applying for a personal loan can be done online or offline, depending on your preference and the lender you choose. Here’s a breakdown of the typical steps involved:

Before you apply:

• Figure out how much money you need and what you’ll use it for.
• Many lenders have eligibility requirements based on factors like credit score and income. You can often find these details on the lender’s website or by using an eligibility calculator.
• Compare interest rates and terms from different lenders to get the best deal.

Applying for the loan:

• Online application: Many lenders offer a quick and easy online application process. You’ll typically need to provide basic personal information, employment details, and your desired loan amount.
• Offline application: Visit a branch of the lender and fill out a physical application form. A representative can assist you if needed.

Documentation:

• Once you submit your application, the lender will likely ask for documents to verify your identity, income, and address. These may include:
  1. Photo ID (driver’s license, passport)
  2. Proof of address (utility bill, rental agreement)
  3. Bank statements
  4. Salary slips or tax returns

Loan approval and disbursement:

• The lender will review your application and documents to assess your creditworthiness and determine your eligibility for the loan.
• If approved, you’ll receive a loan offer outlining the interest rate, repayment terms, and monthly payment amount.
• Once you accept the offer, the lender will disburse the loan amount into your bank account.

Personal Loan Interest Rates and Charges

1. Interest Rates:

• Personal loan interest rates vary based on several factors:
  • Credit Score: A good credit score ensures lower interest rates.
  • Loan Amount: Larger loans may have slightly different rates.
  • Lender Policies: Different banks and financial institutions offer varying rates.
• As of now, personal loan interest rates typically range from 9.99% p.a. to 44% p.a.
• Maintaining a good credit score and a positive relationship with the bank can help lower your interest rate.

2. Processing Fees:

• When you apply for a personal loan, the lender usually charges a processing fee.
• HDFC Bank, for instance, offers competitive interest rates and minimal processing fees.
• Existing customers may even avail of additional discounts on processing fees.

3. Documentation Charges:

• Amortization Schedule Charges: Typically around Rs. 50 per schedule for a physical copy.
• Repayment Mode Change Charges: Approximately Rs. 500.
• Payment Return Charges: Around Rs. 450 per instance.

4. Loan Cancellation and Rebooking Charges:

• Loan Cancellation Charges:
  • Allowed within the look-up period from the loan disbursement date.
  • Interest is charged from the disbursement date until loan cancellation is borne by the customer.
  • Processing fees, stamp duty, and other statutory charges are non-refundable.
• Rebooking Charges: Approximately Rs. 1000 + applicable government taxes.

5. Premature Closure Charges:

• Applicable after the look-up period.
• Based on the outstanding principal:
  • Up to 24 EMI repayment: 4% of principal outstanding.
  • Post 24 EMI and up to 36 EMI repayment: 3% of principal outstanding.

Estimated Interest Rate Ranges:

Potential Drawbacks

Personal loans can also have some downsides to consider:

• Higher Interest Rates: Since personal loans are unsecured, they typically carry higher interest rates compared to secured loans.
• Shorter Repayment Terms: Compared to other loans like mortgages, personal loans often have shorter repayment terms, leading to higher monthly payments.

By understanding these features and potential drawbacks, you can determine if a personal loan is the right financial tool to meet your needs.