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No matter how well you plan your finances, unexpected financial needs can arise when you least expect them. In such situations, you might consider options like borrowing from friends, taking out a loan, or using your credit card, each choice has pros and cons. Borrowing from friends or family can be awkward and might strain relationships in the future. That’s why there are two better options, such as taking a personal loan or borrowing against your credit card.
Between the two, personal loans tend to be more favorable than relying heavily on credit cards. If you’re facing a personal expense, need to consolidate debt, or are dealing with a sudden medical emergency, a personal loan can be your best financial solution.
It can help you to handle many monthly payments, from purchases like engagement shopping to home repairs. And the best part is that it comes with lower interest rates compared to credit cards.
However, personal loans come with fees and interest rates, So think carefully before applying for a loan because It can impact your credit score and overall financial health. The popularity of personal loans is on the rise because it is easy to obtain and do not require collateral since they are unsecured loans, and you can receive the money within 48 hours.
What Is a Personal Loan?
A personal loan is money you borrow for various purposes, like consolidating debt, renovating, or planning a special event like a wedding. Banks, credit unions, and online lenders are familiar sources of personal loans where you need to repay the borrowed amount over time, usually with interest, and some lenders may also charge additional fees.
It doesn’t require any collateral or security, involves minimal documentation, and can be used for any legitimate financial need, but you must repay it according to the terms agreed upon with the bank, usually through monthly installments over a few months to a few years.
Banks grant personal loans based on criteria like your employment history, income, profession, credit history, and repayment capacity. Unlike mortgages or auto loans, personal loans are unsecured and not backed by any asset like a house or a car. Because of increased risk for lenders, personal loans tend to have higher interest rates than secured loans.
However, defaulting on a personal loan can have consequences, like it can impact your ability to secure credit cards or other loans. Unlike a credit card, a personal loan provides a lump sum upfront many prefer personal loans over credit cards because of their lower interest rates.
How a Personal Loan Works?
A personal loan works much like any other loan, where you start by applying for your desired loan and submitting the required documents to the bank after evaluating your creditworthiness. The funds will be transferred to your bank account, and you can use them as you see fit.
With a personal loan, you receive a lump sum of money that can be used for various expenses. You then repay this amount in regular installments over a set period.
If you have a fixed-rate loan, your monthly payments will remain unchanged until the loan is fully paid off. However, if you have a variable-rate loan, your interest rate may change, potentially altering the monthly amount you owe.
Types of Personal Loans
1. Unsecured Personal Loans:
These loans don’t require collateral or security and are approved based on your creditworthiness. You can use them for different purposes, like debt consolidation, medical expenses, or even a vacation.
2. Secured Personal Loans:
Unlike unsecured loans, these loans are backed by collateral, like your car or savings account. Because there’s less risk for the lender, secured loans may offer lower interest rates and higher borrowing limits.
3. Fixed-Rate Personal Loans:
The interest rate remains constant throughout the loan term, and your monthly payments remain unchanged. It provides predictability and can be easier to budget.
4. Variable-Rate Personal Loans:
Interest rates for these loans may fluctuate based on changes in a specific financial index. This can lead to varying your monthly payments.
5. Debt Consolidation Loans:
It helps you consolidate multiple debts into a manageable monthly payment. It can save you money on interest and simplify your financial obligations.
6. Home Improvement Loans:
These are loans intended for home improvement projects. It can be secured or unsecured, allowing you to upgrade or repair your home.
7. Medical Loans:
These loans cover medical expenses, including surgeries, treatments, or other healthcare-related costs not covered by insurance. Through this, you manage unexpected medical bills.
8. Wedding Loans:
These loans cover wedding-related expenses like venue, catering, attire, etc.
9. Education Loans:
These loans cover educational expenses like tuition, books, and living costs for college or vocational training. It can be used for yourself or for financing a child’s education.
10. Emergency Loans:
These loans provide quick access to funds for unexpected and urgent expenses like medical emergencies or sudden repairs.
Remember, the availability and terms of these loans may vary depending on the lender and your financial situation. Always compare options and carefully review the terms and conditions before applying for any loan.
Benefits of a Personal Loan
Availing a Personal Loan offers several benefits. Here are some key advantages:
- Flexibility of Use: You can use a Personal Loan for various purposes, such as consolidating debt, covering medical expenses, financing a wedding, or making home improvements.
- No Collateral Required: Unlike other types of loans, Personal Loans are unsecured, meaning you don't need to put up any collateral like a house or car.
- Quick Access to Funds: With streamlined application processes, many lenders can disburse Personal Loan funds relatively quickly, sometimes within 48 hours.
- Fixed or Variable Interest Rates: You can choose between fixed-rate and variable-rate Personal Loans depending on your preference and financial strategy. Fixed rates provide stability, while variable rates may offer lower initial interest.
- Debt Consolidation: If you have multiple high-interest debts, a Personal Loan can be used to consolidate them into a single, more manageable monthly payment with a potentially lower interest rate.
- Builds Credit History: Responsible Personal Loan repayment can positively impact your credit score.
- Predictable Payments: With fixed-rate Personal Loans, your monthly payments remain constant throughout the loan term. It provides predictability and helps in financial planning.
- Minimal Documentation: Personal Loans generally require less documentation than other loans, making the application process more straightforward and efficient.
Documents Required For A Personal Loan
Documentation varies from lender to lender. Here are the essential documents required for a Personal Loan:
- Proof of Income
- Proof of Residence and Identity
- Salary slips and Form 16
- Bank statements
- Latest Income-Tax Returns
- Credit report
- Age proof (birth certificate, passport, Aadhaar card, voter ID, PAN card, etc.)
- Photo identification proof (Aadhaar card, voter ID, PAN card, passport, driving license, etc.)
- Address proof (Aadhaar card, passport, electricity bill, telephone bill, ration card, etc.)
Personal Loan Interest Rate
Interest Rate is the percentage of extra money you pay in addition to the borrowed amount. Personal loans have higher interest rates than different loans. Currently, it ranges from 10% to 15% annually. However, these rates can vary from one bank to another. Your income, credit history, existing loans and EMIs, credit score, and other financial considerations determine the specific rate.
Remember, personal loans may involve processing fees and other associated costs in addition to the interest rate. Here is the list of interest rates offered by various lenders in India.
| Loan Providers | Personal Loan Interest Rates |
|---|---|
|
State Bank of India
|
12.50% - 16.60% |
|
ICICI Bank |
11.59% - 18.49%
|
|
Axis Bank Limited |
15.50% - 24.00% |
|
Bajaj Finserv |
11.99% - 15.50%
|
|
Tata Capital
|
11.99% -19.50%
|
|
UCO Bank
|
11.20% -11.45%
|
|
HDFC Bank
|
11.49% -19.8%
|
|
Andhra Bank
|
13.05% - 14.30%
|
|
Punjab National Bank
|
10.95% - 14.70%
|
|
IIFL
|
13.50% - 18.00% |
Eligibility Criteria For Personal Loan
| Eligibility | Requirements |
|---|---|
|
Age |
Salaried employees are eligible between 21 and 58 years, while self- employed individuals range from 25 to 65. |
|
Income |
A general minimum monthly income varies between Rs. 25,000 - 30,000. Again, it depends on the bank. |
|
Employment Status |
Both salaried and self-employed individuals can apply. |
|
Credit Score |
A good Credit score of 700 or above can be leveraged for favorable loan terms. Some banks prefer a minimum of 700, while others seek 750 or higher. |
|
Work Experience |
Some lenders may require a minimum period of employment, particularly for salaried individuals. |
|
Citizenship |
Personal loan eligibility may be restricted to Indian citizens or specific categories of non-resident Indians (NRIs). |
Remember, these are general criteria, and specifics may vary depending on the lender. Always check with your chosen financial institution for their specific eligibility requirements.
How To Choose the Best Personal Loan?
- Compare Interest Loan
- Choose a suitable loan tenure to match your budget.
- Be aware of fees and charges. Opt for loans with fewer fees.
- Check credit score requirements.
- Opt for loans with minimal documentation requirements.
- Consider quick disbursal options for urgent needs.
- Be aware of cancellation policies with a 48-hour freelook period.
Conclusion
A personal loan may be a beginning in personal finance. Take a responsible approach, discuss openly with your lender, and pledge to make your repayments on time. Remember that protecting your financial future is more critical than focusing only on the money.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
