A Detailed Guide On When To Take A Personal Loan

January 10, 2022


One of the feasible options to quickly meet a financial urgency is definitely a personal loan. Not only can you get them fast, but also they are highly flexible and easily accessible. Furthermore, a personal loan can be instrumental, pertaining to emergencies as well as for weddings, travel, and shopping, and one can do away with collateral as well. However, to determine the apt time to avail of a personal loan, you would require to keep a close tab on the current interest rate pattern. For example, the current interest rate ranges from 7% to 31%, with the lowest interest rate offered by Punjab National Bank. Moreover, it will be prudent to monitor the loan processing fee involved as well.

What is a Personal Loan?

A personal loan is a tool that can effectively enhance one’s financial situation by means of a lender bank which deploys capital to the borrower for a fee. The monetary aid can be used for myriad scenarios such as repayment of previous debts, funding weddings, higher education, home renovations, traveling, etc. Various lending institutions, such as banks, online lenders, and non-banking financial institutions, can let you borrow a personal loan. The loan amount you will borrow will have to be repaid over time in Equated Monthly Instalments.

Generally, in personal loans, there is no requirement for collateral. Furthermore, the interest rates, eligibility criteria, and loan amounts vary from one lender to another. The loan repayment duration is agreed upon beforehand based on the monthly repayment capacity set by the borrower.

How Does a Personal Loan Work?

The question of a personal loan can be simply addressed by saying it’s just like any other loan. A financial need arises, and banks can lend you some assistance for interest. This can even be the case if you have a low-paying regular salary. A lump-sum amount is deposited in your bank account in the personal loan. The loan repayment is made in a fixed time at a fixed interest rate for that period. The repayment tenure can vary from one year to 10 years. There are mainly two ways banks offer a personal loan.

The first is the secured way where the collateral is involved. In that case, the banks can simply occupy the asset attached as a part of repayment in case the borrower defaults.

On the contrary, there is no such obligation with an unsecured loan. Thus in case of loan repayment defaults, the banks do not have any leverage. However, this can cause your credit score to plummet gravely, inviting high-interest rates with low capital. And in the worst-case scenario, rejection of a loan application. The lender may even file a lawsuit to retrieve the personal loan’s fees, interest, and outstanding debts.

There are other personal loan finance such as a line of credit with a predetermined credit limit, also known as an unsecured revolving personal line of credit. The interest rate on the line of credit varies depending upon the prevailing market interest rate. As a borrower, you can pay back the credit you withdrew and the interest charges.

Purpose Of A Personal Loan

Why anybody would need a personal loan is far bigger than anticipated. There are indeed several reasons why one would need a personal loan. We have listed some pointers on how personal loan finance can help.

House Renovation

For a quick house renovation, a personal loan might wager better than a home loan. This is mainly owing to the fact that personal loan finance excludes the possibility of keeping collateral on the line while getting competitive interest rates. Since home renovation is an expensive take-out, shorter personal tenures also assist in lowering the hassle of taking a huge costly home loan on your shoulders.

Tackling a Medical Emergency

Meet your medical expenses with quick and easy personal loan finance as medical emergencies demand instant financial support. Because a personal loan is processed, approved, and disbursed fast with less documentation, it can help meet your medical needs on time, and hassle-free.

Education and Tuition Fees

Another sure-shot use of a personal loan is to finance your education. If you plan to continue your studies in either India or abroad, taking a personal loan can help you cover all the expenses. As there is no restriction on the loan amount, you can use it for education fees and living expenses.

Improving Credit Score

A personal loan comes in handy when you pay old debts. As your previous dues get cleared via the personal loan, a new payment cycle starts, only applicable to your loan repayment. This reflects on your CIBIL score. And, because the EMIs for the principal amount are designed per your repayment capabilities and bear low-interest rates, you can pay them back quickly. This, in turn, improves your credit score.

Marriage Expenses

Weddings are a once-in-a-lifetime event wherein the desire to have a glorious and expensive one is common. Instilling a sense of self-sufficiency, and personal loans can go a long way to fulfilling these desires while keeping your savings intact. From arranging wedding venues and shopping to going on your honeymoon trip abroad, a personal loan helps you finance the entire affair meticulously.

Fulfill Your Dream Holiday

Personal loans help in times of need and fulfill your desire to go on a dream holiday. Being a fast, flexible, and easily repayable finance product, you can instantly avail of a personal loan online and go on the trip without any delays.

Benefits and Features of a Personal Loan

With much said about personal loan finance, there are still various benefits attached to instant monetary aid. Leverage these benefits to meet several financial goals. Some of the advantages and features of a personal loan include the following pointers.

  • Flexible Repayment Tenure: Personal loan offers flexible repayment tenure that suits your convenience. You can decide the loan tenure depending on your required budget and time.
  • Fixed Interest Rate: Personal loan offers affordable interest rates and interest types, including fixed and floating interest rates. However, opting for a fixed interest rate is far safer as it remains undeterred by market fluctuations. You only have to be mindful that you opt for a loan with fixed interest rates when the rates are running low in the market. That way, your EMIs will be affordable, and the struggle of repaying on time or financial shortage ends.
  • Collateral-free Loan: Personal loans are unsecured and do not require collateral. It is one of the reasons for personal loan lending as the borrowers do not need to mortgage their valuable assets.
  • Rapid Loan Amount Disbursal: A personal loan offers quick loan disbursement to the borrower’s account. The rapid disbursal makes the personal loan a good decision for medical or financial emergencies.
  • Simply Eligibility Criteria: A personal loan has simple eligibility criteria. For lending a personal loan, you need to be an Indian citizen between the age of 21 to 65 years and have a good credit score. Even with poor credit scores, personal loans are approved at higher interest rates. The principal amount disbursed is lower than the standard required amount.
  • Minimal Documentation: One of the reasons for personal loan availing is because of minimal documentation. Required documents to avail of a personal loan are identity proof, address proof, income proof, passport-size photographs, and credit report.
  • Funding of up to ₹ 25 Lakhs: You can get a personal loan amount of up to ₹ 25 lakhs for fulfilling all your present and future personal financial needs. Once you meet a personal loan eligibility criteria, you can lend up to ₹ 25 lakhs.
  • Unrestricted Use of Loan Amount: One of the best reasons for choosing a home loan is to use the principal amount any way you want. There is no hard and fast rule that you must use the money a certain way when using a personal loan.

Eligibility Criteria For Securing a Personal Loan

There are a few requirements before one can apply for a personal loan. These parameters need to be fulfilled for one to qualify for personal loan finance. Although the eligibility criteria for securing personal loan finance are merely indicative for banks to estimate a loan amount, they still need to be adhered to avoid rejection. Here are some pointers one needs to consider:

  • The applicant should be within an age range of 21 to 68
  • Must have a source of income. This could mean that the applicant is salaried, self-employed, a business owner, and so on.
  • The employee should have a background of up to 2 years of employment
  • A minimum salary of INR 5000
  • The most critical factor is having a CIBIL score of 750 or above.

With all these factors in mind, the applicant must also be able to agree to pay an EMI up to 65% of their monthly salary.

Personal Loan Finance Duration

Tenure is an essential factor when it comes to applying for a personal loan. It so happens that financial planning is always a pivotal part of life, no matter how small the expenses are. Moreover, in terms of a loan, the duration can affect in ways where one can either pay a lot of interest or save some of it. Even for banks, time can be crucial as they can afford to offer a longer duration for a younger applicant than their senior counterparts. Furthermore, a loan duration can determine how much one will end up paying in terms of the accumulated interest. For instance, a longer-term loan means more accumulated interest but lesser monthly installments, while a shorter-term loan means less accumulated interest but higher monthly installments.

From Which Bank/Financial Institution Should One Borrow?

One should always research banks with the low-interest rates at the time of applying for loans.

If you don’t want to burden yourself with bigger EMIs, then you should make sure that you pay small principal repayment at the end of every year or quarter, whatever suits your repayment capacity.

Some of the best banks / financial institutions that one can consider for availing of personal loan finance are as follows.

Financial Institutions Interest Rates
SBI 9.80 % to 13.80 %
IDFC First Bank 10.49 % to 25 %
Tata Capital 10.99 %
Axis Bank 10.25 %
IndusInd Bank 10.49 %
ICICI Bank 10.50 %
Bajaj Finserv 13.00 %
Kotak Mahindra Bank 10.99 %
HDFC Bank 10.50 % to 21 %

Can I Apply Jointly with my Spouse?

You can also have a co-applicant who would apply for the loan with you, in such a case, the credit scores of both the applicants are required for the process. In case of default of such loans, both applicants’ credit scores are affected as both become responsible for the repayment of the loan. Besides the spouse, your co-applicant could also be your parent, siblings, etc.

Documents Required for a Personal Loan

Documents required for applying for personal loan finance are minimal. Yet it is certainly a necessary step in the process. However, there are many ways to apply for a person without any documentation. It requires one to be a long-term customer with a bank, build a high credit score, or look out for a pre-approved loan.

The essential documents necessary for securing personal loan finance are as follows:

  • Identity proof documents such as Aadaar Card, PAN card, driving license, voter card, etc.
  • Residential proof documents such as Aadaar Card, PAN card, driving license, voter card, utility bills, and other Government-issued identification cards.
  • Bank account details such as passbook, canceled cheque, etc.
  • Salary slip from employment

Balance Transfer Offer

Balance Transfer Offer simply means the process in which an outstanding amount of loan is repaid with the assistance of another bank loan with a different interest rate. This is a great way to pay off the initial loan amount while getting a better interest rate offer. With a personal loan, one can pay off their existing debts. However, the customer needs to be careful with the policies of various lenders pertaining to their prepayment fees. Usually, banks allow users to switch their lenders within a year before their tenure closes in. The balance transfer offer will also enable customers to get a lower interest rate offer.

Things to Avoid While Applying For a Personal Loan

There are a few things to consider before considering applying for a personal loan. These pointers can prove highly pivotal in savings and decreasing recurring expenses. One of the main factors that one needs to avoid while applying for a personal loan is not assessing their financial situation. It can happen if a customer has applied for a loan but will end up defaulting due to economic wear and tear. This will harm their credit rating and might get in a legal tussle with the lenders.

Connected with that is shopping around too much that the applicant becomes noticeable among banks leaving a negative impression. This, too, can affect the creditworthiness of the applicant. Furthermore, avoid not disclosing existing debts. This can backfire as one may end up incurring too many EMI expenses. Defaulting on even a single EMI can hamper the credit score. Carefully consider terms and conditions, and ascertain the right duration while applying for a personal loan. Finally, do not forget to compare a few lender options. A few are healthy.

Frequently Asked Questions

How long can a personal loan be?

Personal loans can vary from 48 months to 60 months, and some banks also offer personal loans for 84 months.

What is a good interest rate for a personal loan?

Interest rates are subjective as they depend on the country's economic conditions. In times of inflation, the interest rates are usually on the higher side, whereas during deflation, it is vice-versa. You can only avail of a good interest rate which is apt as per the country's economic conditions by having a CIBIL score above 750.

Which bank gives personal loans easily?

You might have Pre-approved loans from banks you are already customers with; besides that, you could also apply online on applications or the banks' official websites, top includes HDFC bank and ICICI bank, as the time it takes for approvals is the least for these banks.

Who is eligible for a personal loan?

Anyone with a Pan Card, Resident proof, Identity proof, salary slips, and a minimum of 21 years old

How is having a higher credit score beneficial?

Having a high credit score eases the process of approval and disbursal of loans, as credit scores make it easy for banks to trust the customer with lower interest rates, longer tenures, higher amounts etc.

What is the risk of having a personal loan?

Even a single repayment default could affect your credit score; this would cause difficulty in getting future loan approval or getting loans with high-interest rates.

Is taking a personal loan worth it?

Yes, if you need instant funds, personal loans are the best option to go for. A personal loan is approved instantly, and no collateral is demanded against it. Furthermore, the principal amount is disbursed to the applicant’s account within a day or two. All of these features together make up for one of the most suitable financial products in the country, catering to everyone’s needs.

Tushar Gautam is a content writer inclined to enlighten his readers about the world of finance through Urban Money.

Looking for something more?

Need Loan Assistance?

Resend OTP

Please Select City
Get Best Offers
please enter your name


please enter your vaild phone number please verify your phone number Otp resend Sucessfully

Resend OTP

please enter your otp please enter valid otp
Please Select City
Please Select Loan Type

Need Loan Assistance?