The Ravi Gupta family was excited about finally getting to remodel their home something they’d been wanting to do for over a year. However, their excitement transformed into anxiety when their contractor told them the bills for the project would come to around Rs 10,00,000 They knew they could be arranged only Rs 5,00,0000 on their fixed deposits account,
The Ravi Gupta was all set to scrap their plans for their dream home when their contractor told them about another possible way to fund the remodel: a personal loan. With their good credit, they could get a five-year loan at an interest rate of around 7% – the half year of what they’d have to pay on their fixed deposits account. Not only could they pay it off faster, but their monthly payments would also be just under Rs 8000 per month,
Personal loans aren’t nearly as common a way to borrow money as credit cards. According to the Reserve bank of india(RBI) data ,in may 2010 the the total outstanding personal loan amounting with bank stood at Rs 5.89 lakh crore this amount as on june 2018 was 19.33 lakh crore and according to RBI credit card outstanding 3.93 crore and on june 2011 it was 1.76 core
What Is a Personal Loan?
The type of borrowing most people know best is credit cards, which are a form of revolving debt. They give you access to a pool of cash that you can dip into as needed. You can take as long as you like to pay off this debt, as long as you meet the minimum payment each month, and the interest rate is likely to vary over time.
Personal loans are completely different. They’re a type of installment loan, in which you borrow money from a bank or other lender and pay it back in regular monthly payments over a fixed period of time. The term for most personal loans is between two and five years, but it can be as little as one year or as long as seven. The interest rate is usually fixed over the entire life of the loan.
There are two main types of personal loans:
Secured Personal Loans. With a secured loan, you offer the bank something of value as collateral, such as your house, car, or the cash in a CD or savings account. If you’re unable to make your payments, the bank can seize your collateral to pay off the loan.
Unsecured Personal Loans. Most personal loans are unsecured – not backed by any sort of collateral. Instead, the bank looks at your financial history to decide whether you qualify for the loan. Because these loans are riskier for the bank, they tend to come with higher interest rates.
Examples of Personal Loans
People take out personal loans for a variety of reasons. The most popular ones include:
Debt Consolidation. When you use a personal loan for debts consolidation you borrow one large sum of money and use it to pay off all your other debts, such as credit cards, education loans, and auto loans. Debt consolidation can make managing your finances easier because you only have one monthly payment to keep track of, instead of multiple payments to different creditors. It can also save you money if the debt consolidation loan has a lower interest rate than the other
Unexpected Expenses. Major, unplanned expenses, such as hefty medical bills or major car repairs, can completely derail your finances. The best way to handle crises like these is to have emergency funds to cover the cost. However, if you don’t have one, or if you’ve already exhausted it, a personal loan can be a good way to turn a massive one-time expense into a series of manageable payments.
Home Improvements. Home renovations can be expensive. According to, home advisor it costs an average of Rs 20, 000 to remodel a bathroom, Rs 40,000 to remodel a kitchen, and Rs 2,00,000 to build an addition. Many homeowners don’t have that kind of cash on hand, so a personal loan can be a way to do the renovations right away and pay the bills over time.
Wedding Costs. Weddings are another big, one-time expense. Although it’s certainly possible to plan a wedding budget it’s not uncommon for Indian couples to spend 12,00,000 or more to host the wedding of their dreams. A personal loan can be a cheaper alternative for financing this big event than another loan.
Vacation Expenses. Some people even take out personal loans to pay for a dream vacation. Granted, it makes more sense to save for a special vacation beforehand, but if you have a once-in-a-lifetime opportunity and don’t have the cash, a personal loan could be your next-best alternative.
Sources of Personal Loans
There are several places to apply for a personal loan. You can get this type of loan through government and privates banks, online lenders like, or peer-to-peer (P2P) lending networks like i2ifunding and finance buddha. Online and P2P lenders are convenient to use, but some of them aren’t available to borrowers in every state.
No matter what kind of lender you use, it will want to look at your finances before approving a personal loan. The lender will pull your credit report and check out details like your credit history, credit card, and debt to -income ratio. The better your credit is, the more likely you are to qualify for a loan, and the better the interest rate will be.
What are the documents required to apply for a personal loan?
The types of documents to be submitted when applying for a personal loan varies from lender to lender. However, the common documents required by most lenders include:
Documents for Salaried Individuals:
Proof of Identity:- Aadhar Card, Passport, Driving License, Voters ID or PAN Card
Proof of Residence: Aadhar Card, Passport, Driving License, Voters ID or Utility Bills
Latest 3 Months Bank Statement of Salary Account
Salary Slip for the last 3 months
Documents for Self-Employed:
Proof of Identity: Aadhar Card, Passport, Driving License, Voters ID or PAN Card
Proof of Residence: Aadhar Card, Passport, Driving License, Voters ID or Utility Bills
Income proof: Audited financial statement by CA previous two year
Last 6 months Bank statement
Office address proof
advantages of personal loan
They Have Many Uses. Many types of loans, such as mortgages, auto loans, and student loans, can only be used for one specific purpose. A personal loan, by contrast, can be used for anything you like.
Quick disbursal when compared to other forms of credit :
It is easy to get quick disbursal on personal loans when you compare to other loans. Therefore, it can be the friend in need in times of financial emergencies
You Don’t Need Collateral. Most personal loans don’t require any kind of collateral. This makes them a good choice for people who don’t have anything of value to borrow against.
You Can Borrow Any Amount. Typical amounts for a personal loan range from Rs 5,00,000 to Rs 10,00,000. That means you can borrow a lot more with this type of loan than you could with a credit card, yet you can also use one if you only need a relatively small amount.
Rates Are Reasonable. Personal loans are often cheaper than home loan borrowing. For a borrower with a good credit score, interest rates for this type of loan can be as low as 5% APR,
You Don’t Need Great Credit. It’s possible to qualify for a personal loan even if your credit is poor. Some lenders are willing to offer personal loans to customers with credit scores of 600 or even lower. These borrowers are likely to pay higher interest rates – as much as 36% APR. However, that’s still much less than the interest on a payday loan which is one of the most common options for subprime borrowers.
You Have Plenty of Time to Pay. Another big problem with payday loans is that you only get a couple of weeks to pay them off in full. Many cash-strapped borrowers can’t manage this, and so they end up rolling over the loan or taking out another one right away. Personal loans give you at least a year to pay off the debt, breaking it down into much smaller and more manageable monthly payments.
Disadvantages of Personal Loans
Despite their benefits, personal loans aren’t always the best way to borrow money. Here are a few of their drawbacks:
Fixed Payments. When you borrow money with a credit card, you can take as long as you need to pay it back. A personal loan, by contrast, has fixed payments that must be made on time. If you don’t meet these payments, the lender can seize your collateral if it’s a secured loan or sues you for nonpayment if it’s an unsecured one
Strict eligibility criteria: Being an unsecured form of credit, the eligibility criteria are very strict. Generally, a person with a good credit score (700 or above), enough repayment capacity and a good income are eligible. This is why it is always advisable to check your eligibility before applying.
Higher Rates Than Some Loans. For borrowers with good credit, personal loans typically offer lower interest rates than credit cards. However, for those with poor credit, a personal loan could cost as much as a credit card loan or more. Personal loans, especially unsecured ones, can also cost more than other types of installment loans, such as home equity loans.
Prepayment Penalties: When you borrow money with a credit card, you can avoid paying interest by simply paying off the full balance as soon as you can afford it. However, with a personal loan, that’s not always possible. Many banks charge you a prepayment penalty if you pay off your loan early so they can make up for the interest they’re missing out on.
Adverse effect on credit score: Just like on-time loan payments are the best way to boost your credit score, a single miss of payment adversely affects your score. Hence, a person must be careful to not miss any payments. A good way to avoid missing payment is if you use an EMI alert reminder.
Knowing the pros and cons will give you the power to assess whether you should go for it or not. Therefore, it is best to compare different loan offers to find the one that is best for you
If you need to borrow money, there are several reasons why a personal loan might be a good choice. For instance:
Origination Fees. In addition to the interest, many personal loans come with an “origination fee” to cover the cost of processing the loan. This fee is typically between 1% and 6% of the amount borrowed. You must pay this full amount upfront when you take out the loan, rather than paying it back over time as part of your monthly payment.
Potential for Scams. A final risk of taking out a personal loan is that not all loan offers are legitimate. Scammers sometimes offer fake personal loan applications in order to get hold of your personal information, which they use to steal your identity In some cases, they also charge you a fee upfront to initiate the loan, then disappear with the money. This is known as an advance-fee scam.
Alternatives to a Personal Loan
Depending on your situation, a personal loan might not be the best way for you to borrow money. Before taking one out, check out these alternatives to see if one of them is a better deal for you:
Balance Transfers. in India the common forms of debts are usually credit card and mortgage personal loan the personal loan another type of debt you borrowed any type of debt education loan, home loan, car loan bank and financial institution provided facilities of transferring the outstanding balance to new loan account with new terms of loan this also applies to credit card the balance on them can be transferred in balance transfer you adopt another bank the bank will be provided you new set of features including lower rates of interest the bank gives you another facility on balance interest up will not we charged up to 6 months for example – if you borrowed 2,00,000 for at the 9% p.a for the 3 years EMI comes to 6,359.95 The total interest will be paid by you Rs 28,958.2 then the payment including interest and principle 2,28,953 if you with go balance transfer offer after one year another bank interest rate 6% p.a the outstanding balance 1,00,000 The EMI at 6% p.a for 2 years 3042.19 you saved 1526.19 the total sum payable by you including interest 1,03,042.19 after balance transfer offer adopt by you The EMI amout and intrest payble by you is reduced
Credit Cards. If your credit isn’t that great, borrowing with a credit card could be cheaper than taking out a personal loan. To figure out which is better for you, check the interest rate on your credit card and use a credit card payoff calculator, such as the one at emicalculator, to figure out how long it will take to pay off your debt and how much you’ll pay in interest. Then check out the terms of a personal loan and figure out how much it will cost you in total, including interest and fees. The emicalculator also has a personal loan calculator you can use for this purpose. Finally, compare the two numbers to see which loan is cheaper. -.
3. line of credit is – basically an agreement between a borrower and the lender whether it is a bank or an NBFC. According to this agreement, the lender is ready to lend a maximum amount to the borrower. The borrower can withdraw money any time he or she wants until they reach the maximum limit. The interest is charged only on the borrowed amount, not on the maximum amount. This is one of the biggest advantages of having a line of credit. The money borrowed can be used for any purpose and to fulfill any type of requirement.
Make Sure You Can Afford It. Remember, when you take out a personal loan, you’re committing to pay it back on time. If you fail to meet the payments, you could lose your collateral or end up in court. So, before you sign on the dotted line, check your personal budget and make sure you can afford to make the monthly payments.
Personal loans can be a convenient way to borrow money, but they’re not ideal for every situation. A zero-interest balance transfer is often a better deal for those with good credit, and straight-up credit card borrowing can be better for those with poor credit. The only way to know for sure is to do the math for yourself.
Have you ever taken out a personal loan? Would you recommend it?share this post :