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Updated on: Tuesday, August 17, 2021, 04:39 PM IST

Applying for personal loan? Here's how to apply for it; all you need to know

There are specified loans like a home loan and car loan, where the house or the car itself becomes the security. While these are bigger amounts, there are smaller loans such as personal loans that do not need to be secured against any asset. | Image by InspiredImages from Pixabay

There are specified loans like a home loan and car loan, where the house or the car itself becomes the security. While these are bigger amounts, there are smaller loans such as personal loans that do not need to be secured against any asset. | Image by InspiredImages from Pixabay

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A loan is any sum of money borrowed by an individual or an entity with a pledge to pay back the full amount with interest after a fixed period of time. Loans allow people to pay for their expenses like a house or a car that they can’t afford on their monthly income. The money is also borrowed for commercial purposes like setting up businesses.

There are specified loans like a home loan and car loan, where the house or the car itself becomes the security. While these are bigger amounts, there are smaller loans such as personal loans that do not need to be secured against any asset.

Personal loans can help you finance any household shortfalls ranging from house repairs to paying for children’s education, medical emergencies, vacations, or weddings. They are better than making purchases from credit cards due to a comparatively lower interest rate. One can even take a personal loan for paying off the balance of high-interest credit cards. It eliminates the hassle of managing multiple monthly payments.

How to take a personal loan?

Nowadays, one can apply online for a personal loan immediately and they are disbursed in the period of two weeks.

Personal loans are issued by banking or non-banking financial companies (NBFC) on the basis of income level, credit, employment history, repayment capacity, etc.

As it is an unsecured loan, the borrower doesn’t have to put up collateral such as gold or property. It means the lender cannot auction the same or anything you own in case of a default.

However, one must note before taking a personal loan that since they are not secure, interest rates are higher than home, car or gold loans. The rate of interest is also determined on the basis of the borrower’s previous relationship with the lender, loan amount, tenure, etc. It is because of the greater perceived risk when sanctioning them.

Defaulting on a personal loan results in a bad credit report, causing problems when you apply for credit cards or other loans in the future.

Personal loans are short-term loans

Personal loans are also short-term loans, hence their tenure for repayment can be one to five years or 12 to 60 months. Nevertheless, it varies from case to case. One can borrow a minimum amount of Rs 30,000 as a personal loan and the maximum amount depends upon the credit score, current income levels and other liabilities.

If somebody has a credit score of 900, it means they have paid their previous debts properly. These conditions make for a safe borrower, allowing banks to issue larger amounts. If somebody has a lower income or not enough credit, they may not be eligible for higher personal loans.

Alternative from banks and NBFCs

Fintech companies have further revolutionized the lending sector with their advanced solutions. The fintech platforms use data, analytics, robust technology and customer experience to underwrite loans that are personalized. Among several advantages, these companies allow even the “undeserving people” with loans.

For taking a loan, a person needs a credit score but it is not possible for somebody young to have a sufficient credit score. Hence, they are given loans on the basis of other factors.

Why instant loans are popular

Instant loans are gaining popularity among millennials because of their advantages. Firstly, a quick and convenient process allows a completely digital and seamless process. It takes even less time for the disbursement of the loan.

Since fintech companies use algorithms that combine traditional and alternate data for underwriting, the loans are more personalized and flexible. Even in the case of repayment, customers are provided with ease and flexibility.

The borrowers can pay back the loan using digital instruments like a debit mandate, e-NACH or payment gateways. It is a big step towards convenience and cost-saving.

The eligibility criteria are simple, one needs to be in the age group of 21 – 55 years with a minimum monthly income of Rs 15,000. In the documents, one just needs to submit Aadhaar and PAN card along with a bank statement. It is instantly verified and the loan is disbursed immediately.

Option for personal loans expand

In a nutshell, the options for personal loans have expanded over the period of time with NBFCs and fintech platforms. All one has to do is check what suits them the most on the basis of customer service, rate of interest and the amount they need. Before taking a loan, keep in mind that it has to be paid back with interest.

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Published on: Tuesday, August 17, 2021, 04:32 PM IST
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