What is a personal loan?
Used well, personal loans can help you meet your fund requirements in a clean, no-fuss manner. Read here to know more about personal loans.
A personal loan is an unsecured loan taken by individuals from a bank or a non-banking financial company (NBFC) to meet their current financial requirement. The key point to note is that it is a unsecured loan . It means that the borrower does not provide his assets like a property as a collateral. Hence, In case of a default, the lender, in this case, the bank or NBFC, cannot auction anything to recover his dues.
Then, how is the loan provided? Well, it is provided and approved on the basis of factors such as income level, credit and employment history, repayment capacity and also the credit rating of the applicant.
How do personal loans work?
Personal loans can really come handy when stuck in an emergency. However, it would be prudent to know how it actually works before applying for the same.
Personal loans work like any other loan - there is a fixed amount one borrows(principal amount) and then repays it over a fixed tenure in a fixed equated monthly instalment (also known as EMI). EMI's also includes the interest amount. The rate of interest charged depends on factors that determine the borrowers repaying capacity.
How Do Lenders Decide Personal Loan Eligibility?
Whether you want to apply for a small bank loan or a big amount, there are 5 broad criteria used to decide the personal loan eligibility of an applicant:
- 1. Credit score
- 2. Current income
- 3. Employment history
- 4. Current EMI's being paid by the borrower and
- 5. Repayment history
All these factors go on to reflect in the CIBIL Score of loan applicant. On an average, a score of 750+ is considered a good score when applying for a loan.
What are the different types of personal loans in India?
Depending upon the purpose for which you are availing personal loan, we list here the different kinds of personal loans:,
1. Marriage Loan:
Loans for marriage purpose can easily be availed with most banks providing wedding loans. You may use it for wedding venue booking to buying jewellery and any other miscellaneous expenses that a wedding may entail.
2. Holiday Loan:
It may be a smart idea to avail of bank loans for travelling and finance your vacation with ease. Using your savings can dig a serious hole in your cash availability. At the same time using a credit card may seem convenient but it entails a very high rate of interest. The approved loan amount and the interest both will depend on your creditworthiness (read credit score) and your travel destination.
3. Consumer Durables Loan:
There are many consumer durable loan providers that offer 100% finance option for purchasing consumer durable products like washing machine, refrigerators, air conditioners, mobile phones, and tablets.
4. Home renovation:
One can take out a personal loan to make home improvements or finance your home’s repair and renovation. For instance, one may take a kitchen renovation loan. This comes with a tax benefit too as interest paid on such loans is exempt from tax.
5. Festival Loans:
There are usually short-term loans provided to tide over a major festival like Christmas or Diwali. The loan amount ranges from Rs. 5000 to Rs. 50,000 and the maximum tenure is 1 year. The interest rate, however, varies from bank to bank.
6. Medical Emergency Personal Loan:
For those who do not have adequate health insurance cover, the medical emergency personal loan can certainly come in handy. The maximum loan tenure is 5 years.
7. Debt Consolidation Personal Loan:
In case you want to restructure your personal balance sheet and combine multiple loans carrying a high rate of interest into a single loan with a lower rate, the debt consolidation personal loan can help tremendously. It would not only save you the headache of remembering to pay different EMI's on different dates but also help in improving your CIBIL score.
Ultimately what you decide to use your personal loan for is solely at your discretion. But used wisely, it can help you financially in the long run.