Financial flexibility to ease your burden.

A personal loan, also called a consumer loan, is money borrowed from a lender, such as a bank, for an undisclosed purpose. Personal loans have gained popularity because no collateral is required to get funding. Whether you are a salaried individual, a freelancer, or self-employed, you are eligible for a personal loan with proof of steady income. These loans can be used to cover big-ticket expenses, such as marriage, home or office renovation, education, medical emergencies, or even a trip.

Sourcing funds without collateral or restriction on end-use has several advantages.

Advantages of Personal Loans

Fast Loan Approval and Disbursal 

Personal loans are approved very quickly, you can apply for a bank loan online and get personal loan within minutes. 

Minimal Document Requirements 

Since these are unsecured loans, you do not need to deposit collateral and associated documents with the bank loan application. Borrowers only need to submit identity proof, proof of residence, and proof of income. Salaried employees need to deposit their salary slips and bank statements. However, a bank may ask self-employed or freelancing individuals to submit their bank statements for the past few months. 

Flexible Payment Tenure 

The personal loan offers a flexible repayment period because it is granted based on an individual's ability to pay. Usually, a bank will decide the tenure based on the income of the individual. If you have large capital requirements, you can increase your chances of loan approval by extending the tenure

Types of Personal Loans

Most personal loans work in the same manner. However, there are certain differences across different loan products and lender offerings, based on the collateral requirements or duration.

Unsecured Personal Loan

Most personal loans fall under this category since you do not have to put down any collateral. The loan amount is credited to the associated account as a lump sum, and you have to repay it in fixed monthly installments.

Short-Term Personal Loan

The tenure for short-term personal loans is up to 2 years. They are great for small businesses, home renovation, vacations, or seasonal projects. Short-term loans are also called bridge loans when the tenure is less than 15 months.

Long-Term Personal Loan

Personal loans with a duration longer than 3 years are considered longterm loans. While these have comparatively lower interest rates, collateral may sometimes be needed. For instance, as per the bank’s policy, you might need collateral. These are easier to obtain and are often used for expanding the working capital of a business.

Credit Builder Loans

A credit builder loan is a great instrument to plan for larger mortgages, such as a home loan or loan to study abroad. The loan amount is not used to extend the credit line, but to build the CIBIL score via timely repayment of installments. The lender shares your payment reports with the credit bureau to help you get easy approvals for future debt.

When to Consider a Personal Loan?

There are many scenarios where you can consider a personal loan.

Self-Investment 

You can take a personal loan for a professional upskilling course or even a career-boosting seminar. You can also apply for a personal loan when you have to relocate for college education and need capital to make arrangements for accommodation and other needs.

Large Planned Expenses

Marriage or honeymoon travel can be expensive. If you only want to travel for a while or purchase a car, looking for a personal loan is a good idea to cover the expenses. You can repay the loan in small installments

Home/Office Improvements 

Repairs and renovation need funds. Using up all your savings may not be a good idea. A personal loan can address your cash requirements while you continue to enjoy the fruits of your efforts to renovate your spaces.

Emergency Requirements

A personal loan can help navigate stressful personal situations when depositing collateral might not be feasible. Medical and funeral expenses are examples of such unexpected expenses. Instant loan approval and disbursal provide immediate access to capital.

Debt Consolidation

A personal loan can help pay off multiple outstanding loans. If you have a high-interest loan or credit card debt, you can get personal loan approval online and consolidate your debt at lower interest rates into a single loan.

Understanding Personal Loan Interest Rates

A financial institution sanctions a personal loan considering your credit score and payment capacity, and sets interest rates individually for personal loans keeping multiple factors in mind.

Borrower’s Credit Score

In India, your credit score is calculated in the form of a CIBIL rating. A high credit score improves your chances of qualifying for a loan and helps you get lower interest rates. This score popularly ranges between 300 and 900. A credit score of 780 and above is considered “good” for quick loan approval.

Income Consistency

Steady and consistent monthly income means no drastic fluctuations in your income level. This assures the bank that you can pay the installments. If you are a freelancer, you can still show consistency in volume and income from your work to improve your eligibility for lower interest rates.

Debt-to-Income (DTI) Ratio

DTI ratio is an important consideration among banks and financial institutions. Applied loan duration, length of credit history, and the types and duration of credit products you have used are other considerations that help banks get a broader picture of your financial standing and set the interest rates accordingly to minimize debt risk.

Assessing Personal Loan Terms and Conditions

It is critical to fully understand the terms and conditions of a loan. Pay attention to whether the term is fixed or flexible, match your needs, and learn about the penalties and criteria for late or failed EMIs before finalizing a loan.

Managing Your Personal Loan Repayments

Ensuring that all EMIs are paid on time is key to building and maintaining a good credit rating in the long term. A popular technique to manage loan repayments is to set recurring payments from your linked account to avoid missing out on any of the monthly installments. Banks send out reminders a few days in advance, with the recurring payment instruction and also notify, so you can ensure that sufficient balance is available before the due date.

Impact of Personal Loans on Credit Scores

Personal loans are a great way to improve your credit mix (types of credit products you use) and credit utilization (percentage of credit you have used from the total you are eligible for across products). Further, paying your installments on time helps build an overall credit rating that boosts your chances of qualifying for larger mortgages.

However, a high loan amount may make it difficult for you to obtain more credit in the short term. This holds true when acquiring new debt significantly changes your DTI ratio. Taking credit is not considered good or bad, but failing to meet EMI obligations puts you on the list of unreliable borrowers, reducing your eligibility for further loans.

Future Trends in Personal Loans

With advancements in financial technology and the adoption of AI and ML in credit decisioning, novel products will be introduced in the instant personal loan segment. Open banking will further simplify instant loan approval and reduce documentation requirements. These technologies will also facilitate embedding greater flexibility and customizability in loan offerings while multiplying channels of procuring instant credit.

Wrapping it up

Personal loans are a great zero-collateral facility with no restrictions on end use. You can get fast approval on a personal loan if you apply online. However, carefully understanding the product and the bank’s terms and conditions can go a long way in making the right financial decision.