Basics of a personal loan

Personal loans are the one of the most widely chosen options, in case you are in a spot and need some urgent cash. However, personal loans are tricky and you need to know as much as possible about their basics before applying for one. Let's start with some common questions.

What is a personal loan?

Personal loan is credit that is granted to the borrower for personal use. These loans are usually unsecured (no security or collateral required/asked) and is based solely on the borrower's integrity and ability to pay.

Who is eligible for a personal loan?

The eligibility criteria and their specific details may differ from banks to bank based on their perception of the risks associated with given out personal loans. However, nearly all banks divide the potential borrowers into three categories:

• Salaried individuals
• Self employed individuals
• Self employed professionals

Other factors which are taken into consideration are, age, residence, work experience, repayment capacity, past obligations and place of work.

What kinds of interest rates are offered on personal loans?

Personal loans are offered in:

• Fixed rate
• Floating rate
• Flat rate

Of the three, flat rates turn out to be the most expensive since the other two are calculated on a reducing balance basis.

What is the average interest rate for personal loans?

The interest rate for a personal loan is decided on the basis of your credit repayment capability and history. Depending on this, interest rates could be anywhere between 14% and 25%, depending on the financial institution.

What documents are required for personal loans?

Personal loans require the least number of documents, making it the fastest to be approved. Typically, financial institutions would require proof of identity, residence, income and also 3 to 6 months of your bank statements. Some banks also require guarantors and the same set of their documents.

How is a personal loan repaid? Is prepayment of a loan possible?

Normally, personal loans are offered between 1 to 5 years. The loan is repaid with Equal Monthly Instalments (EMIs). Prepayment is possible but will generally carry a significant prepayment charge.

How is a personal loan different from credit card cash advances and loan against property?

These are some basics that you should know when obtaining a personal loan. These days, securing a loan is easy. Repayment is the tough bit. When you don't repay on time, the recovery agent may come knocking at your door.

When getting a personal loan it is important to ask yourself 'Will I be able to pay it off?' Some things which can help you pay back your personal loans are:

Pay off your credit cards: Try to pay off your credit cards as soon as possible, since credit card debts inadvertently hamper loan payments.

Budget your spending: Once you have taken a loan, ensure that you budget your spending, so that if in any unforeseen circumstance you cannot make a monthly payment, your savings will help you out.

Personal loans if not utilized and repaid properly, can become a curse in disguise. Make your decisions prudently to ensure a safe financial future.