With the beginning of the new year, many people will start making plans for a better 2023. These plans may include a big purchase that may require a loan. So, in this article, we will have a detailed discussion on personal loans, their different types, and their uses.
Recently, the demand for personal loans has increased due to the wide variety of loans available in India. These different types of personal loans make it possible for people from all walks of life to meet different financial needs. On top of the increasing demand, the availability of online instant loans has made borrowing quick and easy. Loan aggregators such as Buddy loan make it possible for borrowers to get any financial assistance they need. To learn more about Buddy loan.
Also Read: EMI points for availing a car loan more easily
Personal Loans
A personal loan is an unsecured loan that salaried or self-employed borrowers can take to meet their financial requirements. An unsecured loan is one where you do not have to pledge any asset or provide any collateral to avail of the loan. It is the most popular type of loan as it has flexible usage, meaning a borrower can use it for any purpose. Most people take a personal loan to fund a wedding, for medical expenses, to revamp their homes, or to consolidate debt.
You can get a personal loan from any bank or financial institution. These banks offer interest rates fixed according to the borrower’s credit history and other criteria. Anyone seeking a loan would look for a personal loan at lower interest rates. A lower interest rate will be possible only if the borrower has a credit score of 750 or a CIBIL score of 850. The borrower can also choose the term of the loan, whether they want a short-term personal loan or a long-term personal loan.
Need a personal loan? Find out if you are eligible to get one below.
Eligibility Criteria
A borrower will be eligible for a personal loan if they are at least 25 – 60 years old. A salaried individual working for a government or private company will have a higher chance of loan approval if they get a minimum salary of either Rs. 15,000 or Rs. 20,000 per month. But even a self-employed individual is eligible for a personal loan. The minimum salary amount varies with different lenders or financial institutions. However, an unemployed person can also get a loan if they have a good credit history. You should note that the loan’s approval and interest rates will highly depend on your credit history. Any eligible and responsible person can apply for a personal loan with the documents below.
Documents Needed
Personal loans require very little documentation, which is needed as proof. Some of these documents are:
- PAN card
- For Identity proof, you will need an aadhar card, voter ID, driving license, or passport.
- You will need a passport or PAN card for signature proof.
- You will need a passport, aadhar card, or driving licence for address proof.
- You will need to submit bank statements for the past 6 months, and salary slips as proof of income.
EMI & Tenure
The EMI and tenure of a personal loan will differ depending on individual requirements, repayment capabilities, and lenders. It will also differ depending on the type of personal loan. Long-term personal loans will have a longer repayment tenure of 3 years and more. At the same time, short-term personal loans will have a repayment tenure of 1 year or less. The tenure for a line of credit is very flexible; the interest for the same is also repaid only for the amount borrowed from the issued credit line. Alternative financing and peer-to-peer lending will have tenures and EMIs based on the borrower’s requirements and lender.
Online aggregator applications like Buddy Loan App disburses personal loans at lower interest rates if you have good financial behavior and credit history. The loan tenure can vary from 3 months to 5 years. Specifying your concerns with the lender would be a better option, as they can often customise the EMI payment to enhance your credit score. To learn more about Buddy Loan, click here.
If you need a personal loan, read on to learn more about the different types of personal loans so that you can better understand your financial situation and your choices.
The 5 Types of Personal Loans in India
Primarily, personal loans are classified into the following types.
- Long-Term Personal Loans.
- Short-Term Personal Loans.
- Lines of Credit.
- Alternative Financing.
- Peer to Peer Lending
However, personal loans can be further distinguished into unsecured & secured, having a fixed or variable-rate, and debt consolidation loans.
Long-term loans:
Long-term personal loans are unsecured loans from massive commercial lenders for business projects, expansion, acquisition, and working capital. A long-term personal loan is a type of personal loan with a repayment tenure of about three years or more and can be repaid monthly. A personal loan with more than a five years term might need to be secured with property or other financial assets.
The most significant benefit of long-term loans is they have lower interest rates and ample time to repay with EMIs. This loan is easier to obtain if you have a well-established business with strong returns and a solid growth plan.
However, long-term loans may cause higher repayments due to interest rates and other fees.
Short-term loans
Short-term personal loans are loans that have a shorter tenure for repayment. As the loan time is short, the repayment will be at the end of the loan term. Borrowers can use a short-term loan for smaller projects that yield quick results. They can then repay the loan in 1-2 years. They are great for seasonal businesses of banks, NBFCs, or any financial or IT institutions.
Credit lines
A credit line is a flexible loan from financial institutions that are given at a fixed amount. These include credit cards and short-term loans that customers can access anytime. Interest is charged as soon as money is borrowed, and the compound interest also increases over time. It is best to use these cards when in dire need.
Alternative Financing
Alternative financing is based on crowdfunding resources, asset loans, peer-to-peer & even cash advances. Depending on your business’s regular income or revenue generation, these loans can be short-term or long-term. This kind of financing differs from traditional financing of banks and capital markets as they are more technology-based. Cryptocurrency like Bitcoin is also part of alternative financing.
Peer-to-peer lending
Peer-to-peer lending, or P2P, is also a type of personal loan with alternative lending where the borrower directly borrows money from the lender without a mediator or banking institution. Crowdfunding and social lending are also peer-to-peer lending. Lenders can get more profits, and borrowers can get loans at a lower interest rate.
Peer-to-peer financing is based chiefly on technology finance, where borrowers and lenders meet each other through websites. LendingTree.com is one of the websites that offers P2P.
People can use these types of personal loans for various purposes like funding holidays, home renovation, etc. These will be further discussed in detail below.
Also Read: Personal Loan Benefits You Need To Know Today
What Can The Different Types of Personal Loans Be Used For?
Life can sometimes be unpredictable. Many unaccounted costs can come up in times of emergencies. However, these costs can come up even when you plan to make big purchases or changes to your home. In such hours of need, personal loans can be used for any financial assistance that you may have. Borrowers can take personal loans for the following reasons:
Emergency financial assistance:
Emergency situations can be stressful as they often require substantial financial aid. Medical and funeral emergencies are such examples of emergency requirements. A personal loan is perfect for covering these costs as it can be disbursed quickly, especially through online transactions.
Home renovations:
Every homeowner knows that homes come with many repairs and renovations. Renovations are expensive and will need a lot of funds. Most people take a personal loan to fund their home renovation projects. You can choose any needed amount with a personal loan and repay it at a fixed tenure and interest rate.
Wedding expenses:
We all know weddings are an expensive affair. Funds are needed for the venue, especially when your dream is to have a destination wedding, for food, decorations, and more. Getting a personal loan will be perfect for covering these expenses, especially since there are no restrictions on utilising the loan amount.
Debt consolidation:
A personal loan can be taken to pay off all other outstanding loans. You can take a personal loan when you have many loans due for repayment, credit card debt, or an outstanding loan with a high-interest rate. Personal loans are perfect for debt consolidation as you can get them at a lower interest rate than credit card interest rates.
To purchase a car:
Some people will take a personal loan to purchase a car instead of a vehicle loan. While vehicle loans have lower interest rates, it, however, is secured loan and uses the vehicle as collateral. So to avoid the car being repossessed, most people opt for a personal loan instead, as it is an unsecured loan.
Keeping in mind the types of personal loans and their uses, a borrower must know a few important things before taking a personal loan.
What a borrower needs to know
There are certain factors a borrower will need to look for when applying for a loan. These factors are essential as they can improve your borrowing experience and ensure a smooth and beneficial exchange. Some of these factors are:
Cost estimate:
Estimating the cost of a wedding or renovation project will help to smoothen the borrowing process. Knowing the estimated cost will help you plan the loan better to avoid an unnecessary huge loan amount. A loan amount that exceeds your budget will make it difficult for you to repay. This will, in turn, affect your credit score and future borrowing experience.
Use the EMI calculator:
After estimating the cost of wedding expenses, emergency services, and more, you can use an EMI scale that is present on every loan site. An EMI calculator will help you calculate your monthly EMIs, the total sum of interest rates, and more.
Check your credit score:
Regularly checking your credit score will help you maintain it. You can auto-check your credit score from any online tracker; click here to check your credit score now.
Research for loan offers:
Keeping a keen eye on the market will help you find loans that are suitable for your requirements. Online aggregators are available that can help you with your loans. Check for loan offers carefully, along with the EMIs that the financial institution can provide, before applying for a loan.
With so much mention of online banking and loan aggregators, you may wonder about the benefits of getting a personal loan through online banking.
Also Read: Things You Need To Know Before Taking Out A Home Loan
What Are The Benefits of Banking Online For a Personal Loan?
With the emergence of online banking, getting a personal loan has become easier and faster, so the benefits of getting a loan through online banking and aggregators are:
Saves time during emergencies:
Getting a personal loan through online banking has made emergencies less stressful. This is because the disbursal and processing time is short, fewer documents are needed, and you can do it from the comfort of your home. Online banking is efficient as you save your time by going to the bank and meeting with lenders.
Fewer documents:
There are very few documents needed for online banking. On top of that, uploading the required documents is easy. All you need to do is scan and upload the documents.
Ease of availability:
Getting a personal loan through online banking is desirable as it is available 24/7 at any time of the day. You can apply for a loan at any time during any emergency. The processing time is also very fast as the computer system does it. Loans applied through online banking usually get disbursed within a few days if the documents are in order and your CIBIL score is good.
More choices:
With traditional banking, you will get very limited choices of interest rates, processing fees, loan tenures, and more. However, with online banking, you can get rates from different bankers and choose the one that suits you best. With online loan aggregators, you can get lenders that will customise the loan terms according to your financial requirements and situation.
Every type of personal loan has its own advantages. Some general advantages of a personal loan are given below.
Advantages of Personal Loan
- Unlike many other financial options, personal loans are used for all commercial and personal financial shortcomings. Most people prefer it, as personal loans are unsecured loans.
- A personal loan is flexible and can be used for medical emergencies or consolidating all earlier debts.
- There are decent interest rates for long-term and short-term loans and secured or unsecured loans.
- Depending on your credit scores, many sectors disburse loans with customised EMI options and lower interest rates. An excellent credit score is optional, but a reasonably good score can lower the interest rates during approval.
Also Read: Looking to Apply for a Personal Loan? Advantages of using a Third-Party Aggregator Website
Conclusion
A personal loan is an excellent concept for purchasers. It gives them a chance to heighten their credit scores. But if you do not have graceful credit, a private mortgage would also give a good interest rate and can be more significant than some credit score card fees. Understanding your personal loan choices will help you get the desired plans. Do not aim to get a personal loan simply because it is the last resort. If you would like to apply for a personal loan, now.
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Frequently Asked Questions
Q. Can I apply for a joint personal loan?
A. Yes, applying for a joint personal loan is possible with a co-applicant. It can be your spouse, sibling, or parents. Getting a joint loan will enable you to get a bigger loan amount.
Q. Should I always choose the lowest EMI option when taking a loan?
A. A low EMI may result from a long tenure or good score, but could lead to higher interest payments. Evaluate your repayment capacity using an EMI calculator before deciding.
