What is Personal Loan?
A personal loan is an unsecured credit facility offered by banks and non-bank financial institutions to individuals. Unlike secured loans, it does not require collateral such as property or investments. Borrowers receive a lump-sum amount that they can use for any lawful purpose like covering medical bills, funding a wedding, or consolidating debt and then repay it in fixed monthly instalments called EMIs over a predetermined period.
How Does Personal Loan Work?
When you apply for a personal loan, the lender evaluates your creditworthiness by checking income, employment history, credit score, and existing liabilities. Once approved, the loan amount is disbursed directly into your bank account. You then repay the loan through fixed monthly EMIs, which cover both principal and interest. Early repayment or part-prepayment may be allowed, sometimes with a nominal fee, helping you save on interest over time.
What are the Types of Personal Loans?
There are two main categories of personal loans in India:
- Unsecured Personal Loans: These require no collateral and are based solely on your credit profile and income. They include loans for salaried individuals, self-employed professionals, and special purpose loans like marriage or travel loans.
- Secured Personal Loans: These are backed by an asset such as a fixed deposit or property (loan against property), allowing you to access larger amounts at lower interest rates. Banks may also offer overdraft facilities against your term deposit.
What are the Features of Personal Loan?
Personal loans in India typically offer:
- Quick Disbursal: Funds can be credited within 24-72 hours of approval.
- Flexible Tenure: Repayment periods usually range from 12 to 84 months.
- Minimal Documentation: Lenders require only basic identity, address, and income proofs.
- Fixed EMIs: You know exactly how much you pay each month, making budgeting easier.
- Top-Up and Balance Transfer: Many banks allow you to increase your loan or transfer it to another lender at a lower rate.
What are the Benefits of Personal Loan?
Personal loans provide several advantages:
- No Collateral Needed: You do not have to pledge assets, reducing risk and paperwork.
- Versatile Use: Funds can be used for any personal expense without end-use restrictions.
- Fast Processing: Streamlined procedures and digital applications speed up approval.
- Credit Building: Timely EMI payments improve your credit score, enhancing future borrowing power.
- Emergency Funding: Ideal for unexpected costs like medical emergencies or urgent home repairs.
What are the Interest Rate and Tenure for Personal Loans?
In India, personal loan interest rates typically range from around 10.00% p.a. to 44.00% p.a., depending on factors like your credit score, loan amount, and repayment tenure. Leading banks offer interest rates in the region, some of 10.30%-15.30%, some of 10.85%-21.00%, and some of 10.85%-16.65%, with tenures ranging from 1 to 7 years.
What are the Factors to Consider When Taking Personal Loan?
Before applying, assess:
- Interest Rate Type: Fixed vs. floating rates affect EMI stability.
- Processing Fees: One-time charges can add up, so compare across lenders.
- Prepayment/Foreclosure Charges: Check if you can close the loan early without penalties.
- Loan Amount and Tenure: Longer tenures lower EMIs but increase total interest.
- Customer Service and Digital Tools: A user-friendly portal or app can simplify EMI payments and account tracking.
When is a Personal Loan a Good Idea?
A personal loan makes sense when you need:
- Funds Quickly: For emergencies like medical treatment or urgent travel.
- Debt Consolidation: To combine high-interest debts into one lower-rate loan.
- No Collateral: When you lack assets to pledge for a secured loan.
- Short-Term Financing: For expenses that you can repay within a few years without straining your budget.
What is the Maximum Amount that You can Borrow?
Most banks in India allow personal loans up to ₹50 lakh for salaried individuals. For example, some banks offer up to ₹35 lakh, some banks up to ₹40 lakh, and some banks up to ₹50 lakh, based on your income, credit score, and repayment capacity.
How Can I Improve My Chances of Getting Personal Loan?
To boost approval odds:
- Maintain a Good Credit Score: Aim for 750+ by paying EMIs and credit card bills on time.
- Reduce Existing Liabilities: Lower your debt-to-income ratio by closing small loans.
- Provide Accurate Documentation: Any mismatch can delay or derail your application.
- Opt for a Co-Applicant or Guarantor: A financially strong partner can help secure larger amounts.
- Choose a Shorter Tenure: Lower tenures sometimes attract more favourable rates for better profiles.
Uses of Personal Loan
Personal loans in India can fund a variety of needs, such as:
- Wedding Expenses: Cater to ceremonies, venues, and catering.
- Home Renovation: Upgrade kitchens, bathrooms, or interiors without dipping into savings.
- Medical Emergencies: Cover unexpected healthcare costs quickly.
- Travel and Vacations: Finance dream holidays or family trips.
- Educational or Skill Courses: Pay for certification programmes or workshops not covered by education loans.
What are the Eligibility Criteria to Get Personal Loan?
While criteria vary by lender, most require:
- Age: 21-60 years for salaried applicants; up to 65 for self-employed.
- Minimum Income: ₹25,000-₹30,000 monthly (city-dependent).
- Employment History: At least one year in current job or two years total.
- Credit Score: Generally, 650+ for better rates.
- Residential Stability: Proof of residence for at least one year.
What are the Documents Required to Apply for Personal Loan?
Typically, you will need:
- Identity Proof: Aadhaar card, PAN card, or passport.
- Address Proof: Passport, driver’s licence, utility bills, or rental agreement.
- Income Proof: Latest salary slips (last three months), Form 16, or ITR statements (for self-employed).
- Bank Statements: Last six months’ statements showing salary credits and expenses.
- Photographs: Recent passport-size photos as per lender’s specifications.
How to Get a Personal Loan?
- Research Lenders: Compare rates, fees, and customer reviews.
- Check Eligibility: Use online calculators to estimate EMI and eligibility.
- Apply Online or Offline: Fill out application forms via bank website or branch.
- Submit Documents: Upload or hand over required proofs.
- Verification: Lender conducts background, credit, and income checks.
- Approval and Disbursal: On approval, funds are credited to your account often within 24-72 hours.
Structure of Personal Loan
A personal loan’s structure comprises:
- Principal Amount: The sum you borrow.
- Interest Rate: Annual percentage rate applied to outstanding principal.
- EMI Schedule: Fixed monthly payments covering principal and interest.
- Processing Fee: One-time upfront charge (0.5%-2% of loan amount).
- Prepayment/Foreclosure Terms: Conditions and charges for early repayment.
- Tenure: Loan lifespan, typically 1-7 years.
- Security: Unsecured (no collateral) or secured (against asset), affecting rates and amounts.