Personal Loans are popular funding mediums to get money to finance a vacation, wedding, home renovation, medical emergency, big-ticket purchase, education, debt consolidation, etc. In fact, borrowers can use a Personal Loan for just about anything. They are relatively easy to obtain compared to secured loans and other credit lines since their approval is largely based on the applicant’s income and credit history.
Those who maintain their finances responsibly get easy loan approvals at the best terms and conditions. While it’s time to talk about this excellent funding option, here’s how it works.
What is a Personal Loan?
A Personal Loan is a form of unsecured credit that delivers a lump sum amount to borrowers based on their requirement. The borrower then pays it back with interest amount in regular, monthly Equated Monthly Instalments (EMIs) over the loan tenure. Due to the increasing demand for Personal Loans among Indian consumers, many NBFCs have emerged, offering easy and fast loan options at competitive interest rates. The application process takes less than a few minutes through a website or Instant loan app. Approval is almost instant, depending on how fast the loan company processes the application.
How Do Personal Loans Work?
Personal Loans are collateral-free funds people can easily get from financial institutions and repay them with applicable interest in EMIs during the agreed tenure.
Unlike other loan types that people can use for specific purchases such as car, home, or bike, Personal Loans are great funding options for almost any purpose. For instance, borrowers often use Personal Loans to fund their education, wedding, debt consolidation, appliance or equipment purchase, medical emergency, vacation, or other big expenses.
Once the lender approves an instant loan, they transfer the amount directly into the borrower’s bank account. If they get a loan to refinance their current debt, the new lender can directly pay it off and offer a new loan plan with revised EMIs. However, before applying for a loan, create a budget to prepare for its timely repayment.
Most Personal Loans have fixed interest rates, which means the EMIs remain the same throughout the loan tenure. However, those with variable interest rates have fluctuating EMIs that change every few months. Once the borrower pays off the loan, the lender closes the credit line and marks it paid off in the credit report. Those with a consistent repayment history end up improving their credit score by the loan term-end.
How Does a Personal Loan Work on the Credit Score?
Personal Loans impact the credit score in multiple ways. When an individual applies for a loan, the lender pulls a hard enquiry on their credit profile. It lowers the credit score by a few points. However, the good news is that the borrower can re-earn these points and create a positive impact on the score by making EMI payments on time. If the borrower uses the loan for debt consolidation, it can increase the credit score even more.
Important Components of a Personal Loan
Here are some important components to consider in a loan plan:
- Interest Rate: This is one of the most important features to check in a loan plan. It determines the cost incurred over time. The borrower should try to secure the lowest possible interest rate by choosing the suitable loan plan.
- Repayment Term: Loan term is the period over which the borrower must repay the loan. Most borrowers want to pay off the loan as quickly as possible, but a shorter term increases the EMI amount and makes repayment more challenging. Therefore, borrowers must use an EMI calculator present in the instant loan app to calculate the EMIs for various terms and opt for one with affordable EMIs.
- Loan Amount: Lending institutions offer various loan amounts according to their policy and the applicant’s credibility. One must take out enough to cover what they need but never over-borrow to stress the finances unnecessarily.
Knowing the Different Charges Involved
To understand the working of a Personal Loan, one must also know the different charges involved in it. These include the following:
- Processing Fee: It is a very common fee most loan providers charge for processing loan applications. Typically a percentage of the applied loan amount, applicants need to pay it whether the lender approves or rejects the loan.
- Prepayment Penalty: Lenders charge prepayment penalties when the borrower pays an additional amount besides their EMI or pays the entire amount before the tenure completion. One must check for any prepayment penalties as it may add to the loan cost if you plan to repay the loan ahead of schedule.
- Late Payment Charges: Borrowers must pay each EMI before a monthly due date. If they skip an EMI or delay its payment, they have to pay late payment charges along with the late fee.
How Does the Personal Loan Application Procedure Work?
Research is crucial before applying for a loan. Read reviews and learn its features and benefits before applying. This is how to Apply for a Personal Loan application procedure works:
- Look Around for the Best Interest Rate: Compare different lenders’ interest rates before applying for a loan. Visit their websites and request quotes to choose the best loan deal.
- Decide on the Best Loan Offer: Compare loan amounts, interest rates, eligibility conditions, documentation requirements, customer service, repayment terms, processing charges, and other features before deciding on the best loan offer.
- Apply: Finalise the best offer and visit the NBFC’s website or loan app to fill out an online application form. Enter a few necessary details and provide the required documents to prepare the loan application. Double-check the information and submit the application form.
- Get Approval and Disbursal: The lender will assess the application and approve the loan instantly if the applicant meets the eligibility criteria. Once the applicant accepts the loan offer, the lender disburses the loan amount quickly.
Several lending institutions offer Personal Loans through their website or instant loan app. Knowing how a Personal Loan works helps compare loan plans and make an informed choice. So, before shopping around for a loan plan, reading this guide will familiarise one to make the best decision for their financial situation.