A personal loan is an unsecured type of borrowing option which you can easily avail to fund your financial needs basis your credit history, personal income, and other factors. Whenever you approach a bank or an NBFC (Non-Banking Financial Company) to avail a personal loan, you might receive some product catalogs and financial brochures containing terms and conditions, interest rate details, EMI options, charges etc.
By now, you have given the required thought into “Why you need a personal loan?” but, do you have a thorough understanding of all that entails a personal loan application? In this article, we have prepared a list of basic terms associated with a personal loan to help you make an informed decision.
Let’s take a look at what those terms are:
Your credit score is the first thing that a bank or NBFC will check for when evaluating your loan application. It is a measure of your creditworthiness based on your financial history. It is measured on a scale of 300-900 and a credit score of 750 and above is considered favorable to avail a personal loan. Some of the key factors that affect your credit score include: payment history, credit utilization rate (ratio between what you owe and your total credit limit), Length of credit history, credit mix and recent credit inquiries (Each time you apply for a personal loan, the lender will pull your credit history as a part of the process which is known as a hard inquiry and usually lowers your credit score by a few points) etc. You much ensure that you understand and recognize these factors in order to maintain a healthy credit score. However, there are ways you can apply for personal loan with low credit score.
Collateral is an asset which you provide to the financial institution as a guarantee to back the loan amount you have borrowed. Collateral can be in various forms such as property, fixed deposit account, jewelry or gold, etc. In case of any default in the loan repayment, the lender will recover the loan amount against this collateral.
Also known as prepayment, it means paying off your loan in part or in full before the tenure ends. This eventually leads to the lowering of your monthly EMI payout and in turn reduces your financial burden. The important thing to know here is that some banks / NBFS’s might charge an interest or a pre-closure / pre-payment fee in case you wish to prepay your loan amount. An individual must, therefore, understand and review all terms and conditions (interest rate, processing charges, pre-closure charge etc.) before applying for a personal loan.
Secured and unsecured
These are essentially two types of personal loans: Secured and Unsecured. In a secured personal loan, the lender / the financial institution will ask for collateral to back the loan amount. This collateral will be used by the bank / NBFC to settle the dues in case of non-payment. On the other hand, in case of an unsecured loan, you need not submit any collateral or a guarantor against your personal loan application. The lender will check your repayment capacity and your credit history to decide if you qualify for the loan or not. An unsecured personal loan has an easy, convenient and faster application process but carries a higher rate of interest.
Tenure is essentially defined as the duration for which you have availed the loan. A tenure can usually be customized to suit your needs and an individual would simply need to mention the same in the application form when applying for a personal loan. The tenure usually varies between 1 to 5 years and is translated to equated monthly installments or EMIs for the duration of the tenure.
A personal loan is an ideal borrowing source to fund your financial needs. Being aware of these basic personal loan terms can help you understand your loan offer better and make an informed decision. It would also hasten the process of availing your loan.
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There are also some terms related to tax benefit on personal loan that you should be aware of.