Of the different types of loan options available in India, personal loans are one of the most popular and easy to avail. In this chapter, we’re going to take an in depth look at these loans, the advantages that they pose, and factors that influence your ability to take a personal loan. So, let’s begin with the meaning of a personal loan. 

What is a personal loan?

A personal loan is a kind of a loan that you can avail from a financial institution for satisfying your financial needs and requirements. What sets personal loans apart from other types of loans is the fact that there are absolutely zero restrictions with respect to the usage of the loan amount. This effectively means that you can use a personal loan for almost anything from paying for a vacation to purchasing a new television. 

How does a personal loan work?

So, now that you know the meaning of a personal loan, let’s take a quick look at how it would work. 

Firstly, you would have to approach a financial institution like a bank or an NBFC, fill the personal loan application form, and submit it along with the necessary documents. Nowadays, almost all financial institutions these days allow you to avail an online personal loan within just a few minutes, from the comfort of your own home. 

Once you’ve submitted your loan application, the financial institution checks your credit worthiness to see if you’ve satisfied their requirements. If you do, the loan amount is disbursed directly to your bank account, which you can then use as you see fit. 

You will then have to repay the loan along with interest through Equated Monthly Instalments (EMIs) over the tenure that you chose at the time of submission of your application. 

Factors that influence your personal loan eligibility

The amount of personal loan that you’re eligible for varies depending on a number of factors. Not just the loan amount, but the interest rates as well. Therefore, it is important to be aware of the various factors that can influence your personal loan eligibility. Here are a few of them. 

• Your credit score  

This is one of the most important factors that financial institutions consider when evaluating your personal loan eligibility. The higher your credit score, the lower your personal loan interest rates are likely to be. Also, you may even be able to avail higher loan amounts as well. 

• Your income levels 

The income that you earn can also influence the loan amount and the interest rates. Financial institutions are more likely to offer higher loan amounts and lower interest rates for individuals with high income levels. On the contrary, if your income levels are low or nearabout the minimum requirements specified by the financial institution, the loan amount that you can avail usually would be low.   

• Your financial obligations

Many lenders look at existing financial obligations that you may have when determining the amount of personal loan and the interest rate that you’re eligible for. If you have many ongoing loans that take up a significant portion of your income, no matter how high your income levels may be, you may still not be able to avail a high personal loan amount. 

What are the advantages of a personal loan?

With a personal loan, you get to enjoy several benefits that you may otherwise not be able to with other types of loans. Let’s take a quick look at what makes personal loans stand out from the others. 

• Hassle-free application process 

Applying for a personal loan is extremely easy. This is especially true in the case of an online personal loan. Also, the documentation that you’re required to submit is also very minimal. Some financial institutions even offer pre approved personal loan offers for long standing customers that allow them to avail a loan within just a few minutes.  

• Zero collateral requirements 

As you’ve already seen above, a personal loan is an unsecured loan that doesn’t require you to pledge any asset as collateral. This is a major advantage since it allows individuals and first-time borrowers who don’t own any assets to pledge to avail a credit facility. 

• No usage restrictions 

Unlike other loan options, personal loans do not come with any usage restrictions. With a home loan or an education loan, you’re only permitted to use the loan amount for purchasing a home or funding your or your child’s education. But with a personal loan, you can do whatever you want with the loan amount.  

What are the disadvantages of a personal loan?

Despite the many advantages that they offer, personal loans also come with some downsides. A major area of concern is the high interest rates that are associated with personal loans. Additionally, the eligibility criteria may also be quite stringent because personal loans are unsecured loans. 

Wrapping up

Before applying for a personal loan, be advised that the interest rates on this loan option tend to be far higher compared to other options. This is primarily due to the fact that personal loans are unsecured. So, make sure to keep that in mind when looking for personal loan options. 

With this, you must now be aware of the meaning of a personal loan, its uses, and how it can benefit you. In the next chapter, we’ll see another unsecured loan option; but for businesses. 

A quick recap

• A personal loan is a kind of a loan that you can avail from a financial institution for satisfying your financial needs and requirements. 
• There are no restrictions with respect to the usage of the personal loan amount. 
• Personal loan is an unsecured loan, where you don’t have to pledge any assets as collateral. 
• Some of the factors that can influence your personal loan eligibility are your credit score, your income levels, and your financial obligations. 

The interest rates on personal loans tend to be far higher compared to other loan options due to them being unsecured.