Personal Loans

Banks usually offer a variety of loans classified on the basis of the requirement of the applicant as well as the loan amount. Banks also classify it based on the repayment period for the loan. One of the most popularly availed loans is the personal loan. Personal loans are further sub-classified into various types.

What are Personal Loans?

A personal loan is usually an unsecured type of loan that provides for the day to day needs of a person. Since it is an unsecured loan, the person does not have to put up a collateral for the personal loan. The unsecured nature of the loan also stands true for the fact that the amount that you can borrow for the loan is limited since the bank does not have any security against it.

The amount that a bank grants you for a personal loan depends on your average monthly/annual income. Since it is a type of loan that needs to be repaid from the salary of the person, a personal loan is short termed and comprises of a small amount. A personal loan is flexible since you are free to use the loaned amount freely. You are not bound to use the amount in a particular way, unlike in the case of a home loan where you can only use the amount to purchase a house, or a car loan to purchase a car.

A personal loan is a quick solution for the amount that you might require to pay for a wedding cost, travelling cost or medical emergency. There are various types of personal loans depending upon the need of the person. We shall quickly glance through the various types to find out the best suitable personal loan for you.

Types of Personal Loans

There are several types of personal loans and the names of these loans differ from bank to bank. In case you are confused on what type of personal loan you require, you can refer the list mentioned here for a brief analysis on how a particular type of personal loan helps you. However, the most basic 10 types of personal loans include,

  • Variable-rate Loans – Variable-rate loans are unlike conventional loans since the rate of interest for the loaned amount changes from time to time. The bank will change the rate of interest on the loan at the various stages of the loan repayment period. However, the maximum rate of interest that a bank may charge is fixed for the particular tenure. When the loan repayment period is significantly larger with instalment size varying after each payment, you can opt for a variable-rate loan to save on the interest-fees.
  • Line-of-Credit Loans – There are two different types of line-of-credit loans. Either you can opt for a secured loan or an unsecured line-of-credit loan. The benefits of a secured loan are that it is easier to get a higher amount of loan. In this type of loan, you have a maximum fixed amount that you can get from the bank as a loan. You can borrow a fraction of this amount of loan and pay the interest over that loan only. For subsequent loans, within the maximum limit, you do not need to file another loan request. This type of loan can be helpful when you are applying for a loan for home renovation and do not have the exact idea of how much you will need to spend.
  • Credit Cards – Credit cards are types of short term loans that you can use for day to day purposes like grocery shopping. Most of the banks offer a very low or nil rate of interest on a credit card loan. Since the loan period is short you need to repay the amount within a set period, usually at the end of the month. Banks have now collaborated with several malls and applications to offer you huge discounts on the use of credit card to make the purchase. You usually have a limit on how much you can spend using your credit card depending upon the credit card that you own.
  • Instalment Loans – Instalment loans are one of the most cliched types of loans that require repayment over a specific period. You can borrow a large/small amount of money from the bank and repay it via small instalments after every short interval. The rate of interest over these types of loans can vary from 11% to 22%.
  • Convertible Loans – Convertible loans are thetype of personal loans usually taken up by executives or entrepreneurs. The recipient of the loan offers the bank equity in his/her company for the loan amount once the business starts to flourish. The bank now has the option to either decline this offer and ask for the return or take the equity in the business which might turn out to be worth more after a certain amount of time.
  • Secured/Unsecured Loans – Under some circumstances such as a higher amount of loan for a short period, the bank might ask the loan recipient to present a collateral for the loan. In such cases, the personal loan becomes a secured type of loan unlike in the conventional cases where it is unsecured.
  • Short-term Loans – The short-term loans are generally associated with a very high rate of interest and fees. You can get a high amount of short-term loan in case of a medical emergency when the insurance does not get through. A short-term loan can help you avert a crisis at hand by giving you the necessary boost for the time being given that you have the capability to repay the amount in a short period later.
  • Fixed-rate Loans – This is a conventional personal loan that asks for a fixed rate of interest over the entire period of loan repayment. Unlike in the case of variable-rate of some cases of line-of-credit loans, the fixed-rate loans can help you predict the exact amount of fee that you will pay by the end of the tenure.
  • Payday Loans – The payday loans are similar to short-term loans. However, they have a shorter repayment period, usually less than a month. This type of loan will help you get through a financial crisis before you get your salary check. It is associated with high rates of interest and fees.
  • Single Payment Loans–The short-term, payday, as well as credit card loans, are types of single payment loans in which you pay the loaned amount in a single instalment at the end of the tenure.

When to Apply for a Personal Loan?

There are several reasons why one may apply for a personal loan. Some of these reasons include,

  • Wedding Costs – Investing in a big fat Indian wedding is one of the biggest reasons why people take a personal loan. The personal loan gives you access to money instantly that you can use to cover the various expenses of the wedding. You can repay the loan over the course of a few months or years depending upon the total amount of the loan.
  • Home Renovation – Home renovation is a big expenditure. In case you wish to redecorate your existing house, you have to invest in several factors such as paint, furniture, lighting, appliances, etc. A personal loan will help you complete the shopping without holding back on your dreams.
  • Payment of Immediate Debt – A personal loan can also help you repay a personal debt to a person/company. It will help you repay the debt in case the lender requires the money before the end of the tenure.
  • Medical Emergencies – Medical emergencies such as an accident or surgery are unforeseen costs. A personal loan will help you pay the costs for the time being if claiming your life/health insurance is troublesome in such a case.
  • Make a High-End Purchase – A personal loan can help make a high-end purchase apart from a property, car or two-wheeler. For the other scenarios, you have dedicated types of loans that we will see later.
  • Moving Expenses – Moving from one location to another within a locality is affordable. However, when you wish to move across states of countries, the transportation costs can amount to a huge sum. The personal loan will help you fulfil these costs for the time being.
  • Travel Expenses –In case you wish to take an extended vacation, a personal loan can be of use.

Best Banks for Personal Loans

Almost every bank offers personal loans to its customers. Some of the major banks that offer a low rate of interest on personal loans in India include,

  • HDFC Bank
  • ICICI Bank
  • SBI Bank
  • Axis Bank
  • Punjab National Bank

These banks offer a comfortable range of repayment periods on the personal loans. Most of these banks also offer a variety of credit cards for a short-term loan. These banks have affiliations with several airlines, shopping malls, theatres, etc. to offer you attractive discounts on making the payment via the credit cards.

Eligibility Criteria for a Personal Loan

An unsecured personal loan usually requires the fulfilment of the following criteria,

  • Good Credit Score – A good credit score will help you get a higher personal loan amount faster.
  • Account with the Bank – You must have an account with the bank that you are requesting a loan from.
  • Minimum monthly income – Different banks have different minimum income criteria. For most banks, the minimum income criteria is 15,000 Rupees per month.
  • Minimum 21 years of age –The applicant must be 21 years of age or older. He/she should not be more than 60 years of age.

These criteria might see a little modification depending on the bank and type of personal loan that you apply for.

List of Documents Required for Application of a Personal Loan

When you apply for a personal loan, you will require the following documents.

  • Identity Proof – Pan Card, Driving License,
  • Proof of Residence,
  • Bank Statement – For the account where you deposit your salary,
  • Salary Slips for the past 3-4 months,
  • Passport Size photographs.

You might require additional documents depending upon the choice of bank and the type of personal loan.

Benefits of a Personal Loan

There are several benefits of a personal loan over other types of conventional loans. Some of these benefits include,

  • Easy repayment options,
  • Low-interestrates,
  • Short period of repayment,
  • Helps in emergency situations,
  • Flexibility, depending upon the type of personal loan chosen.