Personal Loan Guide

Personal

5 min read | 10 months ago

Knowing about personal loans is essential for those who require swift and seamless funding to take care of their immediate or short/long-term requirements. Here is a guide to the same.

What is a Personal Loan?

A personal loan is an unsecured loan which means that it does not require any collateral or security. It is sanctioned to individuals meeting specific eligibility criteria for taking care of various needs. Personal loans can be taken for diverse purposes, including home repairs and renovations, travel, wedding expenses, higher education costs, consolidating various liabilities/debts into a single personal loan, buying essential items for the home, purchasing vehicles, purchasing appliances and consumer durables, and even covering the costs of medical emergencies. The processing and disbursal times for these loans are usually faster due to lesser paperwork than secured loans (loans which are secured against assets like homes or cars) and there are minimal documentation requirements.

What are the Types of Personal Loans?

There may be various kinds of personal loans that you can apply for. Some of them include the following:

Unsecured personal loans - These are given without the need for any collateral or security. These are the basic types of personal loans.

Secured Personal Loans - Some banks offer personal loans against security, such as property, vehicles, insurance, savings accounts, gold, or other assets. This happens in cases where applicants do not have stable income sources or good credit scores.

Personal Loan for Debt Consolidation - These are personal loans which are taken to consolidate credit card debts and other loans. A single personal loan is taken for clearing off multiple loans, usually at a more favorable rate of interest.

Personal Loan for Weddings - These are loans taken to finance the costs of weddings, including clothes, jewellery, venues, transportation and logistics, food, accommodation, and more.

Personal Loan for Travel - These are personal loans that are taken for meeting travel costs like accommodation and flight/train bookings, sightseeing, meals, souvenir shopping, etc.

Personal Loan for Home Renovation - These personal loans are taken for repairs or renovations to homes.

Personal Loans for Buying Consumer Durables and Gadgets - These are loans that help customers purchase appliances and gadgets that are useful for their home.

Personal loans can be taken for a variety of purposes as per the requirements of the borrower.

What are the Benefits of Personal Loans?

There are several benefits of personal loans that are worth taking into account. Some of them include the following:

Unsecured Loans - They do not require any collateral or guarantees

Easy application process - Borrowers can swiftly apply for personal loans online at the websites of lenders/banks. They usually have a simple application procedure.

Minimal Documentation - Most personal loans only require basic KYC and income proof documents for processing

Competitive Interest Rates - Nowadays, personal loans are available at attractive rates of interest, making them suitable options to raise funding for sudden requirements.

Flexible Tenures - Borrowers can choose flexible tenures for repaying their personal loans as per their convenience.

Can be Used for Any Purpose - Personal loans can be used for meeting almost any requirement/need. There is no specific purpose that has to be demonstrated to the lender for obtaining these funds.

Swift Processing and Disbursal - If the borrower meets the loan requirements, then the funds are quickly processed and disbursed by banks. These timelines are usually faster in comparison to those for various other types of loans

The biggest advantage is that customers no longer have to dip into their savings, break investments, or borrow from friends or family members to meet urgent financial requirements. They can apply for personal loans and conveniently repay them over time

What are the Eligibility Criteria for Personal Loans?

The eligibility criteria for personal loans may vary across banks and financial institutions. In most cases, they include the following:

Age limit - Banks usually have varying age limits for personal loans, depending on the type of borrower (self-employed and salaried).

Credit score - A good credit score (750 or above) is always helpful while obtaining a personal loan.

Income Proof and Nature of Employment - The borrower should have a stable source of income along with sufficient monthly income to repay the chosen amount. Some banks even have minimum income criteria that borrowers have to fulfill.

What are the Documents Required for Personal Loans?

Some of the documents required while applying for personal loans include the following:

Aadhaar Card and PAN Card as KYC documents

Income proof through the last 6 months' bank statements

Salary slip/Form 16/ITR

Any other document that the bank may require

Why are CIBIL Scores Important for Personal Loans?

CIBIL or credit scores are really essential for personal loans. Here’s why:

Credit/CIBIL scores are examined by banks/financial institutions before sanctioning personal loans.

A good CIBIL score (750 and upwards) will help you increase your loan approval chances

It indicates a good credit management history and may help you enhance your loan eligibility.

It may help you get a personal loan at a lower rate of interest along with more favorable terms and conditions and tenures

A good CIBIL score may also help you obtain a personal loan with minimal documentation and paperwork along with swift approvals

You can use your high CIBIL score as leverage to lower your rate of interest or negotiate for better terms and conditions.

What are the Interest Rates on Personal Loans?

Interest rates vary for personal loans across banks. In most cases, they may hover between 12- 38% per annum. They are dependent on several factors like the borrower's profile, income, overall financial position, tenure, nature of employment, and the loan amount.

What is the Formula to Calculate Personal Loan EMIs?

The personal loan EMI calculation formula is the following:

[P x R x (1+R) ^n] / [(1+R) ^ n-1]

In this case, P stands for the principal, R is the rate of interest and n indicates the number of monthly installments.
Please note that this is the mathematical formula that can give an estimate of the EMI. The actual EMI may vary slightly and there may be additional charges and fees.

*T&C Apply

What is the Prepayment of Personal Loans?

Prepayment means repaying your personal loan prior to the conclusion of the designated repayment duration. It will help you save on the interest costs of the loan across the duration of the loan. You can also free up your money by clearing off your loan before the end of its tenure. Many banks and financial institutions have specific prepayment/foreclosure charges that you should read carefully beforehand. Some also have particular durations/tenures before which you cannot prepay the personal loan.

What is the Amount of a Personal Loan?

The amount of a personal loan is different across banks and financial institutions. In most cases, they range between INR 1 lakh and INR 10 lakh.

What is the Duration of a Personal Loan?

The duration of a personal loan is usually up to a maximum of 36 months. Borrowers can flexibly choose tenures as per their preferences.

What Are the Repayment Options for Personal Loans?

There are several repayment options that can be chosen for personal loans. EMI payments can be made weekly or daily as per the convenience of the borrower. The commonest option is monthly repayments while some borrowers can even choose bullet installments.

Are There Any Fees and Charges for Personal Loans?

There are several fees and charges for personal loans that borrowers should be aware of. Some of them include the following:

Processing fees - Some banks waive these fees for customers, while some charge between 0.50 - 3.00% of the loan amount as the processing fee. For example, Unity Small Finance Bank charges 3% of the loan amount and GST as the processing fee.

Charges for verification - Banks may hire agencies or partners for verifying the borrower credentials in terms of their credit history, credit scores, income, and repayment ability. The cost incurred for verification is usually called the verification charge and has to be paid by the applicant in some cases.

GST (Goods and Services Tax) - For any service that the applicant needs at the time of loan sanctioning or repayment, there is a small fee taken in the form of GST.

Late Payments/Defaults - Cheque bounces or defaults on EMI payments lead to penalties that are imposed by the bank on defaulters.

Foreclosure/Prepayment Penalty - Foreclosure means repaying the loan prior to the completion of its stipulated tenure. Prepaying the debt will lead to a prepayment/foreclosure penalty charged by the bank to cover its losses. This may vary between 2-4% and varies across financial institutions

Duplicate statement charges - Borrowers may have to pay specific amounts for duplicate personal loan statements, containing the amortization schedule, payment schedule, outstanding balance, and other details. This fee may range between Rs. 200-500 in most cases.

Errors to Avoid While Choosing Personal Loans

There are several common errors that you should aim at avoiding while you are selecting personal loans. Some of them include the following:

Not comparing interest rates offered by multiple banks before choosing the right one.

Not checking the processing fees and other charges like prepayment penalties while opting for the personal loan.

Not looking at the terms and conditions of the loan before signing on the dotted line. These include the repayment terms, fees and charges, rate of interest, and other key aspects.

Not calculating your repayment ability and monthly EMI budget and choosing the proper loan amount accordingly.

Applying for more than you need or can afford.

Not having a proper repayment plan in place to avoid missed payments or EMI defaults.

Not looking at your credit score before applying

Not asking the lender for clarification on anything that you do not understand.

Personal loans are helpful choices for borrowers in diverse situations and are easier to obtain (provided one meets the eligibility criteria) than many other loans. They come with attractive rates of interest and flexible tenures, while borrowers can use them for almost any purpose. Hence, they make for excellent choices for those looking to raise funds to meet pressing or immediate requirements.

Conclusion

Get a clear picture of the money that you stand to save in terms of interest costs over a specific tenure. A Credit Information Company report states that almost 50% of the working population of our country is in debt. So, while debt is unavoidable at times, it is important to manage it properly. It is thus vital to ensure that you clear pending debts and combine them into a single personal loan for convenient repayment and financial savings in the long run. You can take a look at digital personal loans offered by Unity Small Finance Bank to cover debt repayment expenses in this regard.

About Unity Small Finance Bank

Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.