Personal loans are a feasible solution for anyone who needs immediate access to money for a specific reason. And unlike conventional loans, the loan approval process is quicker and much simpler. In fact according to Transunion, personal loan is one of the fastest growing loan products since 2016.
The rate of interest is lower, especially for consumers who have a good credit history. The repayment duration is convenient, and since the loan can be taken for any purpose, personal loans are an ideal solution for emergencies.
If you are also thinking of taking a personal loan but have few questions, our comprehensive guidelines will help you make the right decision.
- The Way Personal Loans Work
Simply put, personal loans are a kind of installment loan, which means that the consumer borrows a fixed amount and then pay it back with interest in installments, which could be fortnightly or monthly. Once the loan is paid back with interest, the existing account is closed and in case more money is borrowed by the same consumer then a fresh loan application has to be made.
Since interest rates keep on varying, it’s a good practice to use a Personal Loan Repayment Calculator to get the correct payable amount.
- Types of Personal Loans
Personal loan also fall into two categories:
Unsecured loans, these are not backed by any collateral. Personal financial history is the chief criteria for loan approval.
Secured loans, these require collateral such as savings account; if the consumer is unable to make the payment the lender has full right to claim the secured asset as payment for loan.
- Interest Rates and Other Charges
Interest rate and other charges make a huge difference in the total amount paid to the lender. As an aware consumer it is a good practice to add all the extra costs associated with the loan in order to get an exact repayment amount before actually taking the loan.
Interest Rate: The interest rate typically ranges from 5% to 36%, depending on the tenure of the loan, the lender and personal credit history. People who have a good credit history are charged a lower rate of interest. However, the interest is more if the loan repayment tenure is longer.
Processing Fee: Few lenders tend to charge an extra processing fee to cover the cost of processing the loan. This fee typically ranges from 1% to 5%.
Loan Pre-closure Fee: This fee is levied in case the consumer closes the loan before the defined loan tenure. This fee is changed as a means to cover the loss of interest that they would have otherwise earned.
- How to Use a Personal Loan?
You can tailor the personal loan to suit your specific financial needs.
Consolidate your Debts: If you have reached the maximum spend limit on your credit card then with a personal loan you can easily consolidate your debt. You will pay a lower rate of interest and by making regular monthly payments; you also have an opportunity to improve your credit score.
- 5. Eligibility Criteria
Although the criteria varies from one bank and financial institution to another, the general guideline are more or less the same, these include the details of occupation, age, fixed monthly income, repayment capacity and the place of residence.
In order to qualify a personal loan, the borrower must have a stable and regular source of income, whether you are a salaried professional or a self-employed professional.
Before applying for a personal loan, it is important that all the above aspects are taken into consideration. A personal loan is a safe and secure way of acquiring extra cash, whether you need it for a luxury item, family event, and home emergencies.