Personal Loan: How to apply, features, benefits & more

Certain situations can come in a person’s life when he cannot meet through his savings. But some financial products can help us in those challenging times. One of them is a personal loan.

A personal loan is a financial instrument where you can borrow some amount from a party to meet your personal needs. Unlike a car or a home loan, a personal loan does not require security against any asset. Hence you do not have to put up any collateral. Personal needs can include debt re-consolidation, education for children, home decoration, foreign travel, wedding, etc.

Applying for a personal loan is no longer a difficult task. You can get a personal loan quickly to fund any high and unplanned expense in the comfort of your home. You have to fulfil the eligibility factors as laid out by the lending bank. Then the bank will facilitate the direct transfer of the funds to your bank account.

Currently, the personal loan interest rate given by top banks start at 8.9%. This rate is just slightly higher than securitised loans like gold loans. Punjab National Bank and Union Bank are offering loans starting at 8.95% and 8.9%, respectively. These competitive rates are good news for borrowers.

Banks give the best interest rates to those borrowers who have a good credit score and a steady income. Those borrowers who have a credit score between 750-800 are the most favoured by the financial institutions. Anyone with a credit score below 750 is considered risky.

Any borrower needs to have a carefully thought out repayment plan in place. You have to weigh in your current monthly expenses and that you will incur during the duration of the loan. Also, consider the personal loan EMI that you can afford every month. Any laxity on this part can lead to additional interest penalties.

You should check additional charges like part-prepayment penalties, pre-closure, and processing charges to get clarity before you decide on the loan. Check whether the lender is offering any pre-approved personal loans, as these require minimal documentation and get disbursed fast.

Some of the key features of the personal loan given by leading financial institutions are:

1. Instant approval of loans

The documentation required is minimal as one has to upload only the scanned copies of papers like income proof. The entire process is transparent, and there are no hidden charges.

2. Flexible repayment options

Some lenders provide borrowers with the added convenience of borrowing from their loan limit only when the need arises. You will have to pay interest only on the amount utilised. Individuals can also pre-pay their loans at zero charges whenever they have additional funds. In this way, they can become debt-free sooner. You also have an option for a plan that lets you borrow funds as you require and pre-pay from a sanctioned loan amount. You can also opt to pay only the interest as EMI and repay the principal at the end of the period. It can reduce your EMI by up to 45%.

3. High amounts of disbursal

You need not fret over unprecedented expenses. Lenders are willing to give personal loans ranging from Rs 1 lakh to Rs 25 lakhs. So, you don’t have to deplete your savings. Also, you don’t have to put any collateral to avail of the loan, making the whole process hassle-free.

4. Quick access to funds

Your unsecured personal loan can get approved and disbursed within the same day. Also, you can apply online and don’t have to stand in a long queue at the bank.

5. Choose the repayment schedule

Most lenders do offer flexible terms to make it convenient for the borrower to make the repayment. Some financial institutions can extend the tenure of the personal loan to 5 years.

6. Online customer portal

Online loan account management offers several facilities that improve the service and facilitates the customers. These include access to the repayment schedule, manage EM.I.s, review the terms and conditions, and view the loan statement, all in one place.

7. Customised pre-approved offers

These offers are customised as per the customer’s profile and requirements.

The interest rate of a personal loan depends on the following factors:

• Age
• Credit score
• Gender
• Monthly income
• Loan required
• Type of occupation
• And other parameters as well.

How to apply for a personal loan?

God forbid, it is common to have a medical emergency in these pandemic times. You have to arrange money in a short period, and a personal loan is often the best option. Here, we will take you through the necessary steps on how to go about the application process.

The appraisal is different for salaried and self-employed loan applicants. Once you have chosen your bank, fill out the application, and provide the necessary documents like bank statements, identification, income proof, tax papers, etc. After the loan is approved, you will receive the funds.

Personal Loan Calculator

When you take a loan the Equated Monthly Instalment (or, EMI), is a key parameter that decides the amount and tenure of the loan. A loan calculator is a simple online tool to simplify your loan repayment and help you estimate the EMI options. It uses a combination of different interest rates, loan amounts, and repayment tenures to calculate your monthly installment. A personal loan EMI calculator helps you manage your loan in 3 simple ways:

Get an estimate of the actual cost

The online EMI calculator will help you to understand the interest rate of the personal loan. You can enter a time from 1 year to 5 years. When you fill in the rate of interest and the loan tenure, you can see your EMI and the interest component of your loan.

1. Understand the break-up of EMIs

Once you enter the details like interest rate, loan amount, and tenure, the personal loan EMI calculator will help you to plan the repayment schedule. You can also calculate the duration of the loan repayment that will help you to manage your finances better.

2. Helps you to pick the right EMI

The online EMI calculator will help you to try different permutations and combinations of the loan principal and the time. Larger loan amounts would mean larger EMIs and interest payments, and vice versa. A longer tenure means that your total interest pay-out will go up.

Prepay your personal loan

Personal loans are expensive, and you should ideally prepay whenever you have surplus cash in your bank. Any extra repayments either in bulk or in parts will reduce your interest burden. However, you have to check with your lender if it is willing to accept more than one repayment within the financial year.

Refinance your personal loan

Since interest rates are at a record low, you could consider refinancing your personal loans. It involves taking a new loan that has more attractive terms, to pay back the old loan. You may choose a new bank, or you can refinance the loan through the old financial institution. It can not only lower your annual interest rate, but you can also combine all your debts into one payment. It will help you to save in the long run.

Advantages of refinancing:

1. Reduced monthly payments - Since interest rates are now at a historical low, now is a good time for refinancing. But you should have a good credit score. For example, if you currently have a three-year Rs 100,000 personal loan with an 11% personal loan, your monthly payment would be Rs 3270. By refinancing that loan with a new one at a 5.5% rate, you will reduce your payment to Rs 3020, saving Rs 3000 a year in interest.
2. You can change your loan term - Another advantage of refinancing a personal loan is that you can adjust the period of repayment. To reduce the amount of interest, you can refinance for a shorter period. Though your monthly payment might increase, you can get out of the loan in a shorter period.
3. Opt for a fixed interest rate - You can lock in a lower rate and take advantage of the current economic scenario. It is better than having one with a variable rate of interest.

Steps to refinance a personal loan

1. Obtain payoff figure - First, figure out how much money you need, and then find out what is due to the current lender if you opt for pre-paying your loan amount. You can either call or check online.
   
2. Check your credit report - Knowing your credit score will help you to know your current situation better. If your score is low, take measures to improve it before you apply.
   
3. Compare rates from multiple lenders -You should shop around for the best rates.

Due to a multitude of factors, personal loans have become an indispensable part of our lives. We hope that the above article will help you to navigate the world of personal loans better.

Also read:

What is Home Loan? A Complete Guide.
How does No Cost EMI work?
What is the Difference Between Secured & Unsecured Loans?
What is Business Loan? A Complete Guide.