An individual borrowing money for a personal necessity is referred to as a personal loan. A personal loan is a sum of money that you can borrow and spend on several things. For example, you may utilize a personal loan to pay off debt, finance home improvements, or finance your ideal wedding. Banks, credit unions, and online lenders all provide personal loans. You have to pay back the borrowed funds over time, usually with interest.
As the personal loan is not secured by any property or gold to obtain it, in contrast to a car loan or a mortgage, the lender cannot sell your possessions at auction if you fail to make payments. Personal loans have higher interest rates than loans for homes, vehicles, or gold since there is a greater perceived risk associated with approving them. Moreover, certain lenders may levy fees for personal loans.
Financial organizations offer personal loans, which are unsecured forms of lending, based on factors such as credit history, job history, ability to repay, income level, and profession. A personal loan sometimes referred to as a consumer loan, is a flexible loan that you can utilize to take care of any pressing demands you may have right away.
Key Factors of Personal Loan
Three elements are present in all personal loans:
- Promissory note: The promissory note expires once the conditions of a loan are fulfilled in terms of repayment. The lender may resort to legal action to recoup its funds if loan installments are not made as agreed.
- Borrowed Principal Money: The loan taken by the borrower can be as low as Rs 10000 and it can go up to a maximum amount of Rs. 30 lacks for personal uses.
- The Interest Rate: The lender fixes the interest rate and the borrower pays the interest on a monthly or annual basis.
Read: What is the Difference Between Secured and Unsecured Loans
Types of Personal Loan
- Unsecured Personal loans: This type of loan is not secured by property or other items.
- Secured personal loans: This type of loan is taken out in exchange for collateral like a house, automobile, savings account, life insurance policy, gold, or another asset.
- A personal line of credit Borrowed money that can be accessed whenever needed and is up to a certain limit.
- Personal Loan Against Credit Card: Financed against the available credit on a credit card.
- Pension Loans: These types of loans are taken out by retired workers or senior persons.
Uses of Personal Loans
- Wedding Loan: The loan is taken out for wedding-related expenses.
- Vacation Loan: Borrowed money is used to pay for a vacation.
- House renovation loan: money borrowed to renovate a home. It contributes to the home’s improvement in value on the housing market.
- Loans for consumer durables: This is taken out to pay for items like electrical appliances and furniture.
- Festival loan: Festival loan is very useful when the borrower needs to celebrate some festival on at large scale but he is facing financial problems. Whereas he should be quite sure about the repayment.
- Emergency loan: Personal loans are especially useful in case of crises, like unexpected medical costs, the need for a quick roof replacement, or even funeral costs. When an emergency arises, personal loans can offer outstanding financial support and peace of mind since some allow customers to apply online and receive funds within a few working days.
How to Apply for a Personal Loan
At times of need, such as when paying for sudden medical expenses, an urgent roof replacement, or even funeral expenses, personal loans can be very helpful. Since some personal loans allow borrowers to apply online and receive the money within a few business days, they can provide exceptional financial help and peace of mind in times of need.
- Take credit: You’ll have a better chance of being accepted for a personal loan with the best rates and terms if you have a higher credit score. If your credit score is on the lower end, before applying, challenge any mistakes on your credit reports and take action to raise it.
- Make debt payments: You may be able to get a loan with favorable terms if your debt-to-income ratio is lower. Paying off some of your debts or raising your income will help.
- Get prices from several lenders: After you’ve organized your funds, request loan quotations from different lenders. APRs, loan sizes, periods, and lender reputation should all be compared. Prequalification is a service that certain lenders provide that enables you to estimate the loan conditions without negatively impacting your credit.
- Provide your lender with the necessary paperwork: Once you’ve chosen a lender, you must legally apply for the loan and provide certain financial details. These can contain bank statements and pay slips. Be prepared to demonstrate your payment plan if you do not currently hold employment.
- Get the money: Get the money. If the lender accepts your loan application, they have a few business days to get you the funds. Following that, you can spend the funds as you had intended. By establishing payment reminders, you can safeguard your credit and avoid late fees.
Documents Required for Personal Loan
- Two passport-size photographs
- Income proof: Bank Statement for the last 3 months in case of serving in any organization
- Identity proof: Passport/PAN Card/Driving License/Voters ID/Aadhar Card
- Residence proof: Passport/Aadhaar Card/Utility Bill/Voter ID
- Continuity in Current Job Proof – Form 16/Company Appointment Letter in case of borrowing is in the job
- Income Tax Returns for the last 2 years if the borrower is in any profession or he is self-employed
CIBIL (Credit information bureau India Limited)
- CIBIL determines your credit status
- To qualify for a loan twice or perhaps three times as much.
- To obtain a loan with cheaper interest
- To obtain a personal loan right now for a longer-term
- To obtain a loan with little or no paperwork
- To receive rapid processing and loan approval
- To easily obtain loan approval for properties that are rented or leased, such as houses, office buildings, flats, etc.
- To have greater negotiating power so you can lower your interest rate, adjust the length of your loan payments, or request additional personal loan rights and benefits
Other Charges are to be paid by the Borrower:
Depending on the lender, processing fees for personal loans typically range from 2 to 3 percent of the loan amount. Moreover, there may be a prepayment fee of between 2 and 3 percent if you repay your loan early, or before the term has ended.
Benefits of Personal Loan
- Personal loans require less paperwork and have a quicker approval process than other loans like home loans and gold loans, which require a number of them.
- If the lender is confident in your ability to repay the loan, it will typically be disbursed within a few hours through one of the many financial institutions that offer personal loan online services.
- Lenders give you the freedom to select your loan term, which is another important aspect of personal loans. Personal loans often have terms of one to five years. So, you can choose the loan length based on your ability to make payments. You should choose a shorter loan term to reduce your interest costs and pay off the balance sooner.
Conclusion
When compared to loans for a home, a car, or other items, personal loans are quite simple to apply for and qualify for. Because of this, they can be used for both inexpensive and expensive transactions. Although virtually anything can be done with the money, it’s best to just borrow what you need and only for purposes that will significantly enhance your finances or change your life.