The Ultimate Guide To Personal Loan

While it would be great if we all had enough money to fund all of life’s expenses without worry, we know that’s not the case. Sometimes we have to borrow a little to keep moving forward, and that’s when a personal loan can be a good solution.

Borrowing money which is expected to be paid back with interest is called a loan in technical terms. A person can avail a loan of many kinds such as a home loan, car loan or a business loan. As the names suggest, these loans are taken for a specific use such as buying a home or car or using in business. There is another kind of loan which is a multipurpose loan and can be availed for any kind of use of the borrower. Such loans are known as Personal Loans. Here we have bought an extensive description on a personal loan and its kinds.
A personal loan is a type of loan that involves borrowing a set amount of money and paying the creditor off with interest in a structured payoff schedule. These loans are “unsecured” because you don’t have to put up any collateral (such as your house, car, etc.) to get the loan; instead, lenders use your personal credit and other factors to determine eligibility. The concept is simple and similar to the borrowing you’re used to: you borrow and pay that money back. One of the benefits is that you have more flexibility with what you can use the money for.

What is a Personal Loan?

A personal loan is an installment loan which can be used for any personal use of the borrower. Such loans are repaid through EMIs. The tenure of a personal loan is generally from 12 months to 60 months. Personal loans are best to fight emergencies, as they are fast in disbursal. The processing of a personal loan is much faster than other loans because of a  the minimal documentation. This means you’ll be expected to make a fixed monthly payment for the life of the loan, but it also means you’ll face less uncertainty than with a credit card. With a personal loan, you’ll know exactly how much you borrowed, how much you’ll pay every month and when your debt will be paid in full.

This isn’t to suggest that personal loans are perfect. Like anything else in life, they come with risks and drawbacks. Most of the downsides depend on how responsible you are with credit and what interest rate you’ll pay.

Keep reading to learn more about how personal loans work, which pitfalls to avoid and how to get the most out of the loan you choose.

As we mentioned, a personal loan is easy to grasp. You borrow money at a fixed interest rate, over a fixed amount of time, then you pay a fixed monthly payment until your loan is paid off.

While the terms of your personal loan can depend on an array of factors, these loans are typically offered in amounts up to 30 lacs. You may be able to borrow this amount for any length of time from 12 months to 60 months.

In addition to the interest rate you’ll pay, personal loans may also come with an origination fee which can range from  0.25 percent to as high as 4 percent at some lenders, according to a review of personal loan terms on Myloancare.in. On the bright side, it’s a competitive business and many lenders charge no origination fee or any other fees upfront. The real costs to worry about with personal loans involve the APR. Interest rates charged through personal loans can vary quite a bit, and they are typically higher than you see with secured loans such as home equity or auto loans.

The Key Features and Benefits of a Personal Loan

Personal loans are the most availed credit product of present credit market. This type of loan is popular all around the globe because of the benefits of it. Here are the features of a personal loan

Minimal Documentation– A personal loan needs very minimum documents to be submitted. One can avail a personal loan only with the basic documents such as identity proof, address proof, and income proof.

Quick Processing– Personal loans are best known for being fast in disbursal. One can fight any emergency with a personal loan as most of the lenders disburse a personal loan within a day. Some of the lenders even claim to disburse a loan within a few hours which will be really helpful when you are in need of urgent fund.

Can Avail Online– Personal loans nowadays can be availed online too. Online loans are very convenient for the borrower as it saves much time and effort of both borrower and the lender. Online personal loans make a loan seeker apply personal loan online which is much faster, convenient and secured too and online neutral channel partners like Myloancre.in helps to get loan within moment to max 4 working days.

Multipurpose– The best and the unique feature of a personal loan is being multipurpose. A personal loan can be used for any purpose of the borrower. A lender will never ask you the purpose of the loan. So whatever the use may be, a personal loan is fit for all.

Types Of Personal Loans

Medical Loan– One can avail a personal loan for medical procedures like a surgery, operation, therapy, procedure, etc. Such loans can be availed by the close relatives of the person who needs a medical assistance. ICICI Bank, HDFC Bank and AXIS Bank are some of the renowned banks that grant a medical personal loan.

Festival Loan– Festival loans are taken for celebrating a festival. Such loans are easy to avail and can be even small amounts like Rs.50,000.

Travel Loan– Travel loans are the next type of instant loans which is taken for a travel. With the aid of an instant loan, one can have a travel whenever he/she wants. Such loans are easy to repay as one can opt for a tenure of 2 years which makes the EMI smaller.

Home Renovation Loan– A personal loan can be taken to renovate your home. The good news about a home renovation personal loan is that such loans are tax-free. One can avail a tax exemption if a personal loan is used in purchasing or renovating a home.

Line Of Credit– A line of credit is a way of availing a personal loan of very small amount i.e. Rs 5000. This is a kind of credit card where you will get a maximum amount which you can avail. One can use that particular amount in many parts whenever required.

Business Start-Up Loan– A personal loan is the best way to avail fund for a start-up business as availing a business loan at the initial stage of business is near to impossible. The lenders ask for a minimum of two years turn over the report in order to grant a business loan. One can avail a personal loan and start a business.

Corporate Loan– A corporate loan is taken by the persons who are in business for a quite long time and want to expand their business. Such loan amount can be used for purchasing inventory, working capital or any other kind of use in business.

Debt Consolidation Loan– A debt consolidation is a kind of loan which taken to pay off other loans. It happens many a time that a person has a  number of small loans and credit cards which he/she is to maintain every month. A debt consolidation personal loan is a loan which is equal to the total outstanding amount. By availing such loans, a person closes multiple credit accounts and run a single account which is much better to handle.

Common Uses for a Personal Loan

Debt consolidation

Having different amounts of debt with various creditors can be difficult to handle. Each debt will have its own interest rate, monthly payment, and due date. For these reasons among others, borrowers can sometimes find themselves lost in their debts, resulting in missing payments, paying more interest over time due to higher interest rates, and having another thing to worry about. By taking out a personal loan, you can use that money to pay off your various creditors and be left with just one single monthly payment to make. Consolidation can save you time and money and is one the best benefits a personal loan can offer. If you’re curious how much you could potentially be saving, check out our personal loan calculator.

Credit card payoff

Like debt consolidation, credit card payoff can be a great benefit of a personal loan. You may not have a lot of different sources of debt, but even if you have one credit card debt, it can be worth considering. Credit cards often carry high interest rates that you could potentially avoid by exploring the possibility of a personal loan. Taking out a loan to pay off a credit card can be a smart way to keep a little more of the money you earn for yourself.

Home improvement

Looking to make some home improvements but don’t want to dip into your savings or take out a home equity loan? Personal loans can be a perfect solution for a home improvement project. There is no equity required to qualify for a personal loan, and you can apply from the comfort of your own home and receive your funds in as little as a week. Taking out a personal loan to make those bathroom renovations, upgrade your kitchen, or add a pool or spa to your backyard can be a great option.

Medical expenses

Alright, this isn’t an ideal scenario: you’re sick, need to undergo a procedure but realize you don’t quite have the money available to pay for it. This is a situation where taking out a personal loan can prove beneficial, since you can borrow what you need and select a payoff structure that works with your budget.

Major purchase

Whether you’re making a larger purchase that you’ve deemed necessary or you’re trying to figure out how to pay for a new refrigerator because yours suddenly stopped working, or your latest car issue seems like it’s going to be an expensive one to fix, a personal loan can be a good consideration. Get the money that you need and pay off the balance over a longer period of time.

Vacation

We all need a break from time to time but we know that a vacation can cost a little more than we’d like to spend at any one time. A personal loan can be a good way to finance your vacation, so that you can pay it off over time. And hey, it could be a good monthly reminder of just how much fun you had.

There are many reasons to take out a personal loan and these are just a few. Each individual’s credit history and financial health will influence the interest rates of a personal loan offered; however, it’s very possible that these rates could help you handle the situations outlined here along with many more.

When to avoid using a personal loan

While a personal loan can be a valuable financial tool, there are plenty of times where you might be better off borrowing money a different way – or not borrowing at all.

“Not being able to keep up with the monthly payments means you won’t pay your loan on time,” he says. “If you pay your bills late or not at all, your credit will take a hit. That can lead to higher interest rates and cause your debt to spiral out of control.”

Before you take out a personal loan, you should write out a budget and make sure you can truly afford the monthly payments, he says.

Another time you shouldn’t take out a personal loan is when you don’t truly need what you’re borrowing for – or if you should probably live without it.

“A personal loan can be like a candy store,” says Toms.

The temptation of being able to borrow money can be too much for some people. It can inspire crazy actions, like financing purchases that can leave the borrower in financial peril, Toms says.

Another instance where you may not want to get a personal loan? “If you’re going to buy a house in the near future, you should think twice about taking out a personal loan,” Detweiler says.

This is because the amount you owe can affect how much you can borrow for a home.

Lastly, you should probably avoid a personal loan if you’re on shaky financial ground, says Detweiler.

“If you aren’t in a very stable financial situation, a personal loan could make your problems worse,” she says. “It’s risky because if you don’t make the payments, you could wind up hurting your credit and could end up in default or collections.”

Using personal loans for a vacation might be tempting, but it’s not the wisest choice. However, the truth is, some people do this anyway. In a recent survey, we found that 16 percent of people who said they are going into debt for vacation are using personal loans.

“Don’t borrow money and go into debt for a vacation,” Detweiler urges. “You’ll come back from vacation in debt. Save the money instead, or have a staycation.”

Like vacations, a wedding financed with debt is rarely a good idea.

“Don’t start your marriage in debt,” says Detweiler. If you have to use a personal loan for your wedding, make sure you shop around for a loan with the lowest interest rate and best terms.

How to pick the best personal loan

Shop around with different lenders. Thanks to the internet, it’s easier than ever to shop around and compare rates and loan terms. Internet is an excellent place to start because you can easily explore options from different lenders in one place. Start by filling out an online form.

Read the fine print. Make sure you understand each loan’s terms, conditions and interest rate, along with your monthly payment.

Look for a low-cost loan. Ideally, you should look for a personal loan with the lowest rate and fees (or no fees) you can find.

Read reviews. The internet is a treasure trove for reviews of various lenders. Reading product reviews can help you gauge the quality of each lender and what your experience might be like.

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Alternatives to a Personal Loan

A personal loan might be ideal for helping you reach your financial goals, but it’s also possible a different financial product might work better. As you consider the prospect of a personal loan, don’t forget to explore your other options.

Here are some alternatives to consider, along with some instances where they may represent a better deal:

Personal loans versus credit cards

According to Paul Gentile, president of Cooperative Credit Union Association, there are definitely times where a credit card may be better than a personal loan.

“A credit card can be used to purchase something, so that can offer more flexibility,” he says. Credit cards can also be a great deal if you pay them off monthly, he notes, since you have the potential to earn rewards. Lastly, credit cards can be beneficial for certain short-term purchases since many offer 0 percent APR for 12 to 21 months.

On the flip side, “a personal loan may be better for someone who wants to make a large, intentional purchase that they planned for.”

Personal loans also offer the benefit of a fixed payment and payoff date, whereas credit cards can literally tether you to payments indefinitely if you keep using them for purchases.

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Personal Loans versus cash-out refinancing

Gentile believes that opting for a cash-out refinance is the best option for people committed to their properties in the long term, whereas personal loans are better for short-term financial needs.

There are risks to getting cash out of your home as well, he notes. “If home prices drop, you could end up underwater.”

On the other hand, refinancing your home to get access to your home equity could help you qualify for a lower interest rate than a personal loan. “You also get to write off your mortgage interest, so you get a tax deduction,” notes Gentile

How To Qualify For One

If you’re considering a personal loan, here’s what you’ll need to qualify:

Good or excellent credit – Some personal loan companies will approve you with a credit score as low as 580, according to my personal experience. But having very good credit (a FICO score over 740) will put you in a position to qualify for a personal loan with the best interest rate and terms.

Proof of ability to repay – You need to be able to show your ability to repay your loan, usually with pay stubs or other evidence of employment.

Low debt-to-income ratio – Lenders may be hesitant to lend you money if your debt-to-income ratiois high. This ratio is determined by taking your total monthly recurring debt and dividing it by your monthly income. Discover Personal Loans notes that borrowers with a debt-to-income ratio below 36 percent may qualify for the best terms and rates on loans and mortgages.

Co-signer – If your credit score is poor, you may need a co-signer with good credit to help you qualify for a personal loan.

Age– Age is the first checklist of the lender. One can avail an insta loan only if the applicant is between 21 to 60 years old.

Income- The income of the applicant is also checked as this is the way how a lender determines the highest lending amount and the repayment capacity. The minimum income should be ₹25,000 for salaried persons to avail a personal loan online.

Employment– The duration of the employment is the next criterion of personal loan eligibility. A salaried person must be employed for the minimum of 2 years and a self-employed person must have a record of earning at least for 5 years.

Credit Score– Generally a credit score of 750 is considered as eligible for a personal loan. But if you apply the same from the NBFCs & BANKS like HDFC,IDFC,YES BANK,ICICI, a person who is new to credit can also avail a personal loan. When you are new to credit, your credit score will be 0(zero). In such scenarios, BANKS work better than nbfcs in terms of availing a loan.

The List of Supporting Documents Required for a Personal Loan

• 2 passport size photographs.
•  Identity proof: (passport, voters ID, driving license or pan card).
• Address proof: (lease agreement, less than 3 months old utility bill or passport).
• Last 3 months’ Bank statements.
• Latest 3 months’ salary slip

Documents to prove the business existence in case of self-employed applicants.

The Bottom Line

A personal loan is considered as a boon for the ones who are in an urgent need of fund. Such loans are easy to avail and can be fit for any kind of use. If you avail a personal loan for a meaningful reason and repay it on time, it will make you come over the financial crises while enhancing your credit score.  

  

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