What is personal loan and when should you take one?

Imagine the excitement of planning your dream vacation with your friends or family, only to find you don’t have enough savings to fund the trip. Or you want to renovate your home to make it more aesthetic but are falling short of money. These situations indeed get frustrating as humans. But thankfully, one can escape them with the help of personal loans, also known as consumer loans. 

If you don’t know about consumer loans, don’t worry. Here we will explain everything about them, right from what is a personal loan to how and when to take it.

What is a personal loan?

A personal loan is a financial product that allows individuals to borrow a specific amount of money from a bank or a non-banking financial institution with instant loan approval. Unlike loans secured by collateral (like a car or house), personal loans are unsecured, meaning they don't require any asset as a guarantee. 

Borrowers typically receive a lump sum in their bank accounts, and repayment occurs through fixed monthly installments over a specified period, usually with fixed personal loan rates. The money can be used for various purposes, such as covering expenses for vacation or making last-moment purchases. 

Benefits of personal loans

There are several personal loans benefits to borrowers in need of quick cash. From instant loan approval to minimal documentation, here are some of the benefits of taking personal loans:

• Minimal to zero documentation: Personal loans are offered by NBFCs with minimal to zero documentation. In many cases, you don’t even need to submit any physical document.
• No collateral: Borrowers of personal loans don’t need to provide collateral and can borrow the money on the basis of their credit scores and salary slips/bank statements.
• Instant credit: Personal loans come with instant loan approval and the money is usually credited into the bank accounts of the borrowers in a few minutes to a few hours after the application is processed. In comparison, other loans take days to process before they finally disburse the capital. 
• Repayment flexibility: Consumer loans provide the flexibility to borrowers to select their tenure period based on their repayment capacity to pay the loan instalments. A long repayment period will mean lower monthly instalments. However, you will end up paying more interest towards the loan. In contrast, a shorted period loan means that you will pay higher monthly instalments but will end up paying lesser interest towards your borrowings. 

Documents required for personal loan application

Availing of a personal loan is simple and easy as it requires minimal documentation. Most lenders need a few crucial documents to process your consumer loan applications. Here is the complete list of documents for availing of the loan if you’re a salaried professional: 

• Income proof: You can submit your salary slip or bank statement as an income proof.
• Proof of residence: Telephone bill, gas bill, and bank statement can be used as address proof.
• PAN: Lenders require a Permanent Account Number (PAN) to check your credit score with third-party agencies.
• KYC documents: You can submit an Aadhaar card, Voter ID Card, or Driving License as your identity proof. 

For self-employed applicants, lenders may require additional documents about the business of the individuals. For instance, lenders could ask for educational degrees, shop/business licenses, maintenance bills, etc.  

Taking small personal loans

NBFCs offer small personal loans that start from just a few thousand rupees. These loans help customers meet certain shortages of money for events like home maintenance, job loss, or medical expenditure. Such consumer loans have a short repayment period as they are provided at the convenience of the borrowers. 

Personal loan eligibility

Borrowers need to meet certain criteria to avail of a personal loan from a recognised lender. Here are some of the eligibility conditions: 

• Good credit score
• Aged 21-58 
• 2 years of service

Conclusion

Personal loans acts as a lifeline in times of need as they come with instant loan approval. Their adaptability and accessibility indeed make them a practical choice for various situations when you are struggling to get quick cash.

Whether it's covering unexpected expenses or going for a dream vacation, taking a personal loan can help you with the extra cash within a few minutes to a few hours. For instance, Mahindra Finance provides personal loans to cover unexpected expenses as well as cover costs to fulfil your wishes. These loans can be taken for your dream wedding, consolidating debts, or renovating your home.

Frequently Asked Questions (FAQs)

1. How is eligibility determined for a loan?

Eligibility is often based on factors more than one. Some of the factors that are taken into account are credit score, income, employment history, and debt-to-income ratio. 

2. What are personal loan rates?

Personal loan rates could vary based on several factors such as the tenure of loans, credit scores, and whether it is a secured loan or an unsecured loan. 

3. What is the usual repayment period?

Repayment periods could vary but are usually in the range of 1 year to several years. You can, however, check with the lending partner if you want a lower or higher tenure. 

4. Can consumer loans be used for any purpose?

Yes, the money can be used for various purposes such as for home improvements, emergency medical expenses, or any other unexpected expenses.

5. What happens if you can't repay loan installments?

If you fail to repay a loan installment, you may incur late fees. Not paying the instalments on time or not at all can have an impact on your credit score. Lenders can also take potential legal action against you if you don’t repay your instalments. 

6. Are there any extra charges on foreclosing personal loans?

Foreclosure charges are additional fees that you need to pay to the lender when you decide to repay the loan. These charges depend from lender to lender. 

7. Can I apply for a joint personal loan?

Yes, you can apply for a personal loan jointly with your spouse, or any other family members like parents or siblings. Lenders will consider both the applicants’ income while determining the loan amount.