What is a Personal Loan? A Complete Guide.

Evolution of Personal Loan System Over the Years

Personal loans have become a very popular choice for consumers because of the growing ease of the process.
To understand what a personal loan is, one can state it as an unsecured loan.
Individuals can take personal loans from banks or non-banking financial companies.
Lenders check basic requirements in the candidate like credit score, income level, and employment status.
A personal loan can help benefit the purchase of personal assets like a car, a house, wedding expenses, or a child’s education.
The good thing is that it is not secured against any asset, which means if a default occurs, there won’t be any auctioning of any personal property.
Nonetheless, like most cases of defaulting, it will reflect badly on your credit report.
In that way, it can be considered to be less risky than a home loan or a car loan.
However, the interest rates can be higher as compared to other types of loans.
The personal loan market has been observed to see a huge leap in India with the advent of digital finance in recent years.

Following are the main reasons by which personal finance has become more accessible to everyone:

Digitised Personal Loan Processing

As loan applications have gone online, personal loan sales have increased prominence in the market.
Previously, it was a much more tedious process to physically visit banks, collect information, and get the loan approved.
With digital ease, the process has become much more efficient in terms of time management.
You can easily sit at your home, check your eligibility, and apply for a personal loan online.
It can be done through any bank’s website or finance website.
You can also compare loans offered by different banks and go for what suits you best.
With digital information, you can easily analyse the best deal for yourself without consulting multiple bank officials.

Rising Competition Among Lenders

Lenders have become more lenient in providing personal loans with the rising competition among banks and financial companies.
Most loan providers want to increase their loan sales extensively to boost their overall business.
Previously, it was much different. Personal loans were prone to scrutiny and rejection as lenders asked for additional documents to prove repayment.
With competitors in the market, loan providers want to attract more clients by simplifying the processes than before.
Even if difficulties arise, you can be guided with the help of bank representatives and executives for successful applications.

Multiple Loan Repayment Modes

Banks and financial companies have also eased down on repayment modes by providing more options to the clients.
You can use net banking, Standing Instruction (SI), Electronic Clearing Services (ECS), and other options.
EMI amounts can also be varied according to the customers’ convenience.
They have become much more flexible than before.

Loan Expenses can be Evaluated before an Application

Previously, individuals had to calculate manually what loan amount would be suitable for them.
This method was prone to errors and risk.
Now, it has become very easy to evaluate your expenses before you apply for a personal loan.
You can calculate your equated monthly instalments or EMIs before you select the loan.
An online tool called a personal loan calculator can be used, which can help you analyse your expenses.
It will help you understand how your EMI will vary with different loan amounts in different tenures.
This will help you make a better decision on a plan to take according to your repayment ability.

Attractive Interest Rates By Lenders

Interest rates have become much more feasible.
Banks, as well as non-banking financial providers, charge their rates according to the customers they deal with.
Therefore, low-interest personal loans have become more accessible across the country.
The online application makes it much easier to compare interest rates of different banks and, accordingly, choose what you find to be most suitable.
Generally, personal loan interest rates start at 10.85%.

Credit Score can be Enhanced

The credit score system has added more credibility to approve your loaning schemes.
These scores are evaluated by credit rating agencies like Credit Information Bureau India Limited (CIBIL).
They help in identifying your current financial position concerning your past repayments.
It also helps in simplifying the application process for personal loans.
When you take a personal loan and repay it promptly, it will effectively boost your credit score and help you further in future debt applications.

Loan Options are Available for Different Borrower Categories

Personal loan options have been divided into multiple categories according to the income brackets of individuals.
Banks have categorised them to fit the conveniences of individuals coming from different types of jobs and employment statuses.
Exclusive personal loan schemes are available for pensioners.
This further encourages individuals to take loans, which fits their jobs and expenses.
Therefore, innovative plans and schemes have been provided by banks and finance companies that help individuals and small business owners to take personal loans.
Personal loan amounts can begin from INR 3000.
They can go higher as well, according to your credit score.
The tenure to repay begins from 2 months to 36 months.
Over the years, the process has become smoother and more convenient compared to other types of loans.
Personal loans are in very high demand, and anyone can apply for them online.
A personal loan can be advantageous for home businesses and small enterprises.
One must take advantage of the current state of the market and use these schemes to their best benefit.

FAQs

Q- Who can take a personal loan?

Ans- The eligibility criteria can vary for different banks. The criteria generally ask for a certain requirement of age, income, and occupation. These details can easily be checked by visiting the bank’s website. The general requirements are that you should have a regular source of income irrespective of whether you are a salaried person or a professional in any business. The eligibility can be greatly affected by the company where the individual is working and the credit history or CIBIL score.

Q- How much amount can I take in a personal loan?

Ans- The personal loan amount begins from as low as INR 3000. The amount can increase into lakhs according to your requirement of enterprise and your credit history. The better your credit score, the better chances you have to approve a higher loan.

Q- Is it difficult to apply for a personal loan?

Ans- No. As the banks and finance companies have developed digital services, it is very easy to apply for personal loans as you sit at home. You can apply from anywhere using a laptop or a mobile phone with a stable internet connection. You can easily check the interest rates and EMI options too online.

Q- Why are personal loans in such high demand?

Ans- Personal loans are unsecured by any asset, and it involves much less risk for the candidate as compared to a gold loan or a car loan. They can be provided based on income and repayment capacity. Most banks and non-bank finance companies have started easing the process of approving personal loans as the market has become increasingly competitive. Therefore, individuals can find it easier than before to get approved for personal loans.

Q- How does the credit score affect a personal loan application?

Ans- The credit score of an individual is calculated based on your repayment history of previous loans. The credit score increases if you have completed all payments. A good credit score gives a good impression to your bank or loan provider that you are capable of repaying the personal loan that you have applied for. Hence, a high credit score can increase your chances of getting approved for a personal loan.

Q- How can I use a personal loan?

Ans- An individual can use a personal loan according to their personal needs without the bank monitoring your expenses. Many people use personal loans to start small-scale businesses or in expanding enterprises. People can also use it for personal expenses like weddings, home renovation, education, or even vacations. Personal loans can be very beneficial for those who want to invest in businesses. As long as you are confident that you can repay the loan in a fixed time, you are free to use your personal loan in whatever way you wish.