Personal loans have been around longer than banks. In the old days, if someone needed cash, they’d go to a moneylender who would lend them a sum (usually at a high interest rate). Or they’d use their jewellery as collateral to borrow money from a pawnbroker. Thankfully, this is not an option you need to consider today: the banks have stepped up. Also, because there are so many financial institutions offering this service, and because regulation occurs is a way that it never did before, they’re forced to keep their interest rates at competitive prices – making it relatively easy for you to obtain a personal loan without falling into debt.
What it is and how it works
A personal loan, unlike a car loan or house loan, does not require collateral or security and requires minimal documentation. It’s also – as the name suggests – personal. This means you can use the funds provided by your loan for any financial need whatsoever – so long as it’s legal. And, like any other loan, you need to repay it according to the terms agreed on between you and the bank.
It works the same way as other loans: you apply for a loan, submit the documents, the bank checks whether you’re eligible, sends you the money if you are, and takes repayment in equated monthly installments (EMIs). Your EMI depends on a bunch of things including your credit score, loan amount, tenure and interest rate.
The most important part of the loan process is establishing your creditworthiness to the bank you want to borrow from. Creditworthiness depends on the credit score: determined by your financial history including previous loans, your income over the years and more. The higher your score, the easier it will be to get a personal loan at a low interest rate.
If you are rejected, don’t rush to a financial institution with looser standards. Review your credit history and sit with a trusted financial advisor to figure out what corrections you can make to increase your score.
What it’s used for
Anything. Everything. Fund a holiday. Buy a gadget. Pay for medical treatment. Have that ridiculously expensive wedding. Send your kids to college. Renovate your mouldy bathroom. It’s your money. And you can use it how you want. (Just make sure it’s legal.)
How quickly can you get it?
Sometimes, it’s possible to obtain a loan in hours. Or even minutes. Your bank probably offers a pre-approved personal loan plan that you are, at this minute, eligible for.
Of interest rates, tenures and other relevant financial terms
No matter how easy it is to get a loan, it’s important that you do your research first. Compare the rates offered by different institutions and figure out the best option for you. (For instance, a higher rate of interest and lower tenure period can sometimes save you money in the long run.) To do your research, it’s important to understand certain basic terms:
The interest rate is “the amount of interest due per period, as proportion of the amount lent, deposited or borrowed”. In human terms (as opposed to legal), it’s basically how much interest is paid by someone for the money borrowed – it’s usually a percentage of the sum borrowed so 10% interest means that if you’ve borrowed 100 dollars or yen or euros, you need to pay back 110. Different banks charge different rates which is why it’s important to do your research. Don’t forget that the interest rate you’re charged also depends upon your own personal credit score.
The tenure is the length of time for which your loan has been sanctioned. Usually, personal loans tend to have shorter tenures than home loans. Some institutions do extend the tenure for a slight increase in interest rates. The tenure for a personal loan tends to range anywhere between a few months and a few years.
EMI stands for Equated Monthly Instalment: the amount you pay each month. It will be calculated on the basis of a number of factors including the loan amount, tenure and interest rate. Keep in mind the numbers can be misleading: A long tenure will mean a low EMI but over time, you end up paying more in interest. On the other hand, if you have trouble meeting a high EMI over a short period of time, missing a payment will affect your credit score. It’s always a good idea to make your decision based on your personal financial situation.