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What is a Personal Loan?

Personal Loan Description

A Personal Loan is an unsecured loan offered by banks, NBFCs, or online lenders that can be used for various personal expenses such as medical emergencies, weddings, home renovations, travel, or debt consolidation. … Unlike secured loans, it doesn’t require any collateral, meaning you don’t have to pledge assets like property or gold. The loan is approved based on factors like your credit score, income, employment history, and repayment capacity. It is repaid in the form of Equated Monthly Installments (EMIs) over a fixed tenure, usually ranging from 1 to 5 years. In simple terms, a personal loan allows you to borrow money quickly without any security, which you repay in monthly installments along with interest. Read More

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Fincover® > Banking > Loan > personal loan > What is a Personal Loan?
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Key Takeaways

    What is a Personal Loan?

    Lenders give unsecured personal loans based on how much you earn plus your credit standing and workplace details. No collateral or security conditions accompany personal loans and this feature enables multiple people to apply for these loans. You can use the loan money to pay for medical expenses or home improvements while also traveling and handling your debts.

    The loan program allows you to borrow between ₹100,000 and ₹50 lakhs at periods running from one year to five years. The Reserve Bank of India (RBI) report shows that personal loan acceptability among Indian consumers increased at a 20% yearly rate.

    The Bank of India gives out 2.5 lakh rupees on average as personal loans each year in 2023. Indian consumers depend more on personal loans to handle their mid-sized financial requirements.

    Interesting Fact:  The average personal loan amount disbursed in India in 2023 was ₹2.5 lakhs. This highlights the growing reliance on personal loans for mid-sized financial needs.

    Why Do People Opt for Personal Loans in India?

    People choose personal loans in India because these loans offer many purposes and easy availability. The following list shows why people use personal loans as their preferred financial choice.

    • Medical Emergencies: Medical crises force people to pay unexpected medical costs that deplete their money. Personal loans give you fast access to funds for paying hospital costs and medical treatments.  
    • Weddings: Indian wedding celebrations become costly because of their extensive nature. Personal loans support wedding financing without exhausting personal savings.
    • Home Renovations: Dedicating funds to home renovation will cost you a lot of money. People choose personal loans because they make it easy to fund home betterment efforts.
    • Debt Consolidation: Personal loans enable you to combine several debts into one easier payment that may feature lower interest rates.
    • Education: Personal loans offer support for students to pay for advanced education when official loan programs do not provide enough funds.

    Who is Eligible for a Personal Loan in India?

    All personal loan providers use eligibility criteria to screen loan applicants including these basic conditions.

    • Age: The applicant needs to be between 21 and 60 years old to qualify.
    • Income: Every lender uses a distinct minimum income standard that matches the local living costs in each city.
    • Employment Status: Most lenders approve personal loans for employees with salaries and both independent professionals and business owners.
    • Credit Score: Good credit scores above 700 improve your loan application success rate.
    • Work Experience: Individuals with salaried jobs need 1-2 years of work history while self-employed applicants require proven business stability.

    What Documents are required to Apply for a Personal Loan?

    Documents play a necessary part in the loan application process. Some of the commonly required documents include:

    1. Proof of Identity: Aadhaar Card, PAN Card, Passport, Voter ID, or Driving License.

    2. Proof of Address: Utility bills, rental agreement, passport, or Aadhaar Card.

    3. Income Proof:

    • Salaried Individuals: Latest salary slips, bank statements, Form 16.
    • Self-Employed Individuals: Income tax returns, bank statements, business continuity proof.

    4. Employment Proof: Employee ID card, offer letter, or business registration certificate.

    5. Photographs: Recent passport-sized photographs.

    How to Choose the Best Personal Loan Offer?

    It is important to consider a few factors before zeroing in on the best personal loan option. Some of the parameters which can be compared using an online personal loan aggregator are given below:

    • Compare Interest Rates – Examine loan interest rates because lower rates give you cheaper EMIs.
    • Check Processing Fees – Check the processing fees before accepting any offer to prevent surprise hidden charges.
    • Read Prepayment Terms – Examine the fees for prepayment fees rightaway to avoid heavy foreclosure expenses.
    • Look for Special Offers – During festive times many banks reward their customers with discounted loan rates.
    • Assess Customer Reviews – Base your borrowing decision on positive reviews from past customers.

    What Factors Affect Personal Loan Approval?

    Your personal loan approval depends on several key elements:

    • Credit Score: Personal loans become easier to obtain when your credit score stays above 750.
    • Income Level: Personal loans become easier to obtain when you have more money.
    • FOIR: Fixed obligation to income ratio is the debt-to-income ratio of an individual. It gives the lender a better idea of the debt status of the applicant and how much disposable income they hold. The ideal FOIR expected by the lender is 40%, though some lenders may provide loans for candidates’ upto 60%
    • Employment Status: Lenders are more likely to approve loans for borrowers who maintain steady employment records.
    • Debt-to-Income Ratio: Lenders may reject your application if you carry too many outstanding loan debts.
    • Loan Amount & Tenure: Large loan applications require better financial records to pass eligibility.

    Fun Fact: Nearly 65% Indian personal loan applications fail because applicants have poor credit ratings or lack long-term work stability.

    What are the Current Interest Rates for Personal Loans?

    The interest rate lenders provide for personal loans depends both on the loan provider and the repayment record of the loan applicant. Below is the general range of interest rates offered by leading banks in India:

    Banks
    Personal Loan Interest Rates 2025
    Institution Interest Rates
    HDFC Bank 10.85% – 24.00%
    Axis Bank 11% – 24.00%
    Bandhan Bank 11.90% Onwards
    ICICI Bank 10.85% – 16.25%
    DBS Bank 10.99% – 24.00%
    Bank of Baroda 11.05% – 18.75%
    SBI 11.45% – 14.85%
    IndusInd Bank 10.49% – 24.00%
    Yes Bank 11.25% – 21.00%
    Standard Chartered 11.50% – 24.00%
    IDFC First 10.99% – 23.99%
    Kotak Mahindra Bank 10.99% – 24.00%
    PNB 11.40% – 17.95%
    Indian Bank 10.90% – 24.00%
    NBFCs
    NBFC NameInterest Rate
    InCred16% – 42%
    Finnable16% – 28%
    L&T Finance11% – 24%
    Aditya Birla10% – 32%
    Shriram Finance11% – 42%
    Bajaj Finserv10.75% – 31%
    Piramal Finance12.99% onwards
    Tata Capital11.99% – 35%
    Poonawalla11.49% – 19%
    SMFG13% – 36%
    Axis Finance13% onwards
    Mahindra Finance12% – 36%
    Paysense16.8% – 33%

    How is the EMI for a Personal Loan Calculated?

    The Equated Monthly Installment (EMI) is calculated using the following formula:

    EMI = [P x R x (1+R) ^N]/ [(1+R) ^ (N-1)]

    where –

    • P is the principal amount
    • R is the rate of interest
    • N is the loan tenure

    This is the standard formula used by every online loan calculator. Some parameters may be added depending upon the type of loan

    Example: If you take a ₹6 lakh loan at 12% interest for 5 years, your EMI will be approximately ₹13.347

    How to Apply for a Personal Loan in India?

    You can submit your personal loan request through multiple methods including:

    1. Online Application:

    • Bank Websites: Banks typically let customers submit personal loan applications online. Most banks enable users to submit their personal loan applications online through a web-based system.
    • Financial Marketplaces: Online Financial Marketplaces like Fincover allow users to compare loan offers from multiple lenders and apply online.

    2. Branch Visit:

    • Go the nearest bank preferably where you have savings account and apply for loan. Banks are more likely to lend loans to people who have an existing relationship with them

    How to Repay a Personal Loan Effectively?

    You need to pay back your loan on time to preserve your good credit rating. Here are some tips:

    • Set Up a Mandate:Use automatic payments to ensure you pay your EMI on schedule every month.
    • Prepay Whenever Possible:When you have extra money available prepay your loan to save on interest expenses.
    • Monitor Your Credit Score:Review your credit score results to make sure each loan payment shows correctly on your reports.

    Pro Tip:Use a personal loan EMI calculator to estimate your payments and select a repayment term that does not interfere in your monthly budget

    Can You Prepay or Foreclose a Personal Loan?

    Many lenders support early payment with their personal loans yet they will charge specific rates.:

    • Prepayment Charges: 2-5% of the outstanding principal.
    • Foreclosure Charges: Usually 3-6% of the outstanding amount.

    Pro Tip: Review the loan details for fee information before accepting the contract so you do not pay unnecessary expenses.

    What are the Pros and Cons of Taking a Personal Loan?

    Pros:

    • No need to provide any collateral
    • Wide range of options
    • Quick processing and Disbursal.
    • Minimal Documentation
    • No restriction on end usage (medical, wedding, travel, etc.).

    Cons:

    • You will pay more interest compared to secured loans
    • Eligibility for personal loans have become stringent of late
    • Prepayment/foreclosure penalties may apply even if you decide to make early payments

    Did You Know? 60% of people prefer personal loan for emergencies such as medical expenses and consolidation of other loans

    What are the Alternatives to Personal Loans?

    Personal loans may not be available for everyone so try one of these options:

    • Credit Cards (EMI Option): Suitable for short-term expenses.
    • Gold Loans: You can get loans with low rates on gold but you must put gold up for collateral.
    • Loan Against FD: FD account holders receive special discounts on their loans.
    • Top-up Loans: You may experience lower costs when taking out a top-up loan
    • Peer-to-Peer (P2P) Lending: Personal Lending Platforms link customers who want to borrow and individuals ready to lend at flexible interest rates.

    Fun Fact: A study predicts that personal loans in India will expand by 10.5% annually between 2024 and 2029.

    How to Choose the Right Personal Loan Lender?

    The number of available lenders makes it hard to find the best loan provider. The following elements matter when you make your choice:

    • Interest Rates:Check different lenders to get the best interest rate deal available.
    • Processing Fees:All lenders charge a fee between 1% and 3% of the loan amount as processing fees. Many lenders add penalty fees for early payment.
    • Customer Service:Your search should focus on lenders known for excellent customer service. You can look up review sites to know more about the lender
    • Loan Tenure:Select a repayment tenure that aligns with your current level of income. Extending the loan period decreases your monthly payments while raising the total interest costs.

    Did you know? 65% of borrowers like to borrow personal loans through digital lenders

    How to Avoid Personal Loan Scams?

    With the rise of digital lending, scams and other fraudulent activities have also increased disproportionately. Follow these safety tips:

    • Registered Lenders – Make sure your lender holds an RBI approval before accepting loans
    • Never Share OTPs or Bank Details – Reputed Financial institutions will never request your bank details or OTP protection codes.
    • Read Loan Agreements Carefully – It is advised to read the loan documents completely in prior to avoid any mishappenings
    • Use Official Bank Websites or Apps – Do not borrow from unknown websites or mobile apps. Internet is filled with many fraudulent apps who harass the individuals after providing loans. Borrow only from known

    Did You Know? In FY2023, the total number of fraud cases in the banking system were 13,530. Of this almost 49 per cent or 6,659 cases were in the digital payment – card/internet – category.

    Frequently Asked Questions (FAQs)

    1. Can I get a personal loan with a low credit score?

    While banks may not approve loan for candidates with low credit score, certain NBFCs offer personal loan to such borrowers but be prepared to deal with higher interest rates

    2. How long does it take to get a personal loan approved?

    Online approval happens instantly and your funds are disbursed within 2-3 days to your account.

    3. Is a personal loan better than a credit card loan?

    Easily personal loan are much better option than withdrawing from credit cards as the interest rates and charges are much higher for credit cards

    4. Can I get a personal loan if I’m self-employed?

    Of course, certain lenders provide personal loan to the self-employed people but you’ll need to provide additional documents like ITR and business proof.

    5. What is the maximum loan amount I can get?

    The maximum loan amount depends on your income and the lender’s terms. Salaried individuals generally can get a personal loan up to ₹50 lakhs

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