Introduction

Financial needs can arise anytime. They can be planned, such as a family holiday or children’s wedding, or they can be unplanned, such as a medical emergency. It is not always possible to have a surplus fund to fall back upon in times of need. Personal loans are our friends during such times. They are easy to obtain and can be used for any purpose. In this module, we will talk about the different aspects of personal loans – from what they are? What are the documents needed to obtain them? And a few tips on dos and don’ts. 

Let’s begin!

What are personal loans?

Personal loans are unsecured loans (i.e. it does not require any collateral) taken from a bank or a non-banking financial institution (NBFC) to meet any personal financial needs. The loan is provided based on several criteria such as income level, repayment capacity, credit history and others. Since it does not require any collateral, personal loans carry more risk for the lenders (banks and NBFCs) and hence, typically their interest rates are higher. 

What can the money be used for?

Herein lies the beauty of personal loans. The money obtained through personal loans can be used for any purpose, other than gambling. The bank or NBFC will not monitor the use of the funds. From financing a child’s education to consolidating debt – the fund can be used for a variety of purposes. 

Some of the common uses of personal loans proceeds are given below: 

Of course, one can take a home improvement loan for renovating a house and pay much lesser interest. However, home improvement loans need collateral, which may not be readily available. Similarly, there is a range of business loans available in India. However, most of them need a sound business track record and are not suitable for a person who is starting a business. Personal loans are hassle-free and hence often preferred by people to start a business. 

What is Debt Consolidation? 

We spoke about consolidating debt. Let us tell you in brief what it is. Debt consolidation is combining multiple debts from multiple lenders into one debt from one lender with more favorable terms. 

Suppose a person has a credit card with the outstanding amount of ₹ 60,000 from credit card A, ₹ 75,000 from credit card B, and ₹ 50,000 from credit card C. So, he has a total outstanding of ₹ 1,85,000. Now, the average credit card annualized rate in India is around 40%. So, you can imagine the huge amount of interest he pays on these outstanding amounts. 

Instead, he can choose to take a personal loan of ₹ 1,85,000 from a bank at 15% interest and pay off those credit cards. He will be saving on a huge amount of interest. He can also pay back this personal loan in a few years through EMI that will not create a huge dent in his monthly salary. 

This entire process is known as debt consolidation. 

What is the typical tenure of a personal loan?

Personal loans are given for flexible tenures which typically range from 12 months to 60 months. The longer the tenure, the lower will be the EMI. 

Benefits of taking a personal loan

Personal loans have a range of benefits. Here are some of them:

• Easy financing option: Personal loans are an easy financing option where funds can be used for any purpose and the disbursement is done in a matter of days with minimal documentation. 
• Short tenures: Personal loans are given for shorter tenure which ranges for a maximum period of 60 months. You can choose the tenure you are comfortable with and that meets your needs. 
• No collateral required: This is probably the single reason why personal loans are so popular across the world. You don’t have to mortgage an asset to avail a personal loan. 
• Attractive interest rates: With a good credit history and reliable employment history, it is possible to obtain a personal loan at a good interest rate which makes the EMI quite affordable. 
• Simple eligibility criteria: Personal loans usually have very simple eligibility criteria making it convenient for anyone looking for a financing option. We have discussed more on this in our upcoming section of this module. 

Letter of continuity

While taking a personal loan, you might be asked to sign a letter of continuity. It is basically a legal document acknowledging the loan amount and it will be completely paid off in due time.