What is a Personal Loan? Meaning and Definition

A personal loan is an unsecured loan that you can borrow without providing any collateral. It allows you to access funds for various needs such as medical expenses, travel, education, or debt consolidation.

You can apply for a personal loan based on factors such as your income, employment type, and credit history. Unlike secured loans, you do not need to pledge any asset, making it a flexible and convenient financing option.

A personal loan gives you quick access to funds with minimal documentation, helping you manage planned or unexpected expenses with ease.

A personal loan is a multi-purpose loan that caters to your urgent and planned monetary requirements. Here are some ways in which you can utilise the loan amount:

Tackle Emergencies

One of the key personal loan benefits is you can get quick funds during a medical emergency. You can use the loan to pay for hospitalisation charges, ambulance costs, surgical expenses, medication, etc. This helps you avoid sudden financial strain and focus on recovery. The personal loan amount can also be used to settle any property damage involved during accidents like a car repair cost. Similarly, in case of urgent payments like rent deposits, etc. can be done with the help of a personal loan.

Fund Home Renovations

If your home is in need of a revamp or urgent repairs, a personal loan can be a great option. You can borrow the lump sum amount required and split the financial strain over a repayment tenure into manageable EMIs. This makes it easier to undertake massive renovation projects without breaking the bank.

Fulfil Business Requirements

You can use a personal loan to meet various business needs, such as managing cash flow, covering operational expenses, or fulfilling urgent purchase orders. If the loan is used for business purposes, the interest paid may be claimed as a business expense, subject to applicable tax rules.

Consolidate Debts

Handling the repayment of multiple loans at once can be quite challenging. This is especially the case when the EMI payment date for each credit product varies. Additionally, the interest charges you pay overall may be high as the rates levied on each loan are different. This can lead to delayed payments, defaulting, and high interest charges being paid. You can use a personal loan to consolidate these debts. It can help streamline your EMI payments and even help lower the overall cost of your borrowing. 

Purchase Automobiles

Buying a new car or bike comes with a high upfront cost. Consider getting a personal loan to divide the cost of the automobile and pay it gradually over the set tenure. This helps minimise the impact of the purchase on your finances. You can avoid depleting your savings and instead use it as an emergency fund or invest it for better returns. This ensures you have funds for emergencies which are easily accessible.

Plan Trips and Vacations

If you want to go on a business trip or a long-awaited vacation with your family and friends, fund your travel with a personal loan. You can book your flight tickets, hotel and accommodation, and more, using the loan amount. Additionally, you can cover the cost of food, souvenirs, and various activities with the amount borrowed. This can help expand your travel budget and enjoy all the experiences your destination has to offer. 

You may be wondering about how a personal loan works and things to keep in mind when applying for one.

Let’s understand this process thoroughly to identify the best way to apply for a personal loan:

Researching and Comparing Loan Options

Just as you would compare prices for a new appliance or home renovation materials, it's vital to look for the ideal personal loan that fits your requirements. Numerous banks, NBFCs, and online lending platforms in India offer personal loans. These lenders provide diverse loan options with varying interest rates, loan tenures, and processing fees. Compare these options as thorough research can significantly reduce your overall borrowing cost.  

Fulfil the Application Process

Once you have selected a lender, fill and submit a loan application. This typically involves providing personal details, income documentation, and other relevant financial information. Many lenders now offer online application processes, making it easy for you to apply for a personal loan. Digital financial marketplaces like Bajaj Markets facilitate a 100% digital personal loan application process, saving you time and effort.  

Credit Score Check

Lenders in India evaluate your creditworthiness by assessing your CIBIL score. A strong credit score, ideally 750 or higher, enhances your loan approval chances and often qualifies you for more favourable interest rates. If your score is low, take steps to improve it before applying. Maintain a healthy credit mix, ensure timely payments on all credit obligations, and keep your credit utilisation ratio below 30%. These measures will help boost your score, unlocking access to better credit options.  

Loan Approval and Disbursement

After successful verification, the lender will approve your loan and communicate the terms. These terms include the loan amount, interest rate, repayment period, and EMI amount. Carefully review these terms before accepting the loan offer, as they directly impact the total cost of borrowing. If you have a strong credit profile, high income, and stable finances, negotiate for better terms. Once you agree, sign the loan agreement to proceed.  

Receiving the Funds

Upon accepting the loan terms, the funds will be disbursed, typically via direct transfer to your bank account. The time taken for this process to be completed can range from a few minutes to a couple of business days, depending on the lender's policies. Once the funds are credited, you can use them for your intended purpose, whether it's home renovation, debt consolidation, or medical expenses.  

Repaying the Loan

Following disbursement, the loan repayment is initiated. Herein, you are required to pay your EMIs according to the agreed-upon schedule. Most lenders offer various repayment methods, including online transfers, standing instructions for auto-debit, and cheque payments. Timely repayment is important to avoid late payment charges and to maintain a healthy credit history.

Here’s an example to help you understand how personal loan repayment works. Suppose you take a personal loan of ₹2 Lakhs for home renovations at a 14% p.a. interest rate and a 3-year repayment period. In this case, the EMI would be approximately ₹6,835. Over the 3 years, you will repay the ₹2 Lakh principal amount along with approximately ₹46,078 in interest. 

This example demonstrates how a personal loan can fund your needs, but it's crucial to factor in the interest component when budgeting. Remember, responsible borrowing ensures a smooth financial experience. 

Consider using a personal loan EMI calculator to get an estimate of the instalments you may be required to pay instantly. You can also utilise the free amortisation schedule generated on each calculation. This schedule consists of a complete breakdown of your instalments and how it contributes towards servicing your loan. 

You can gain valuable insight by analysing this schedule and plan your prepayments accordingly, which can help you save significantly on interest costs. However, do note that certain lenders may charge a penalty if you utilise this facility. Be sure that the interest savings offset the additional charges imposed by the lender when you opt for a prepayment. 

Based on how you choose to utilise your loan, it is commonly segregated into the following categories:

• Marriage Loans: Funds specifically for wedding expenses
  

• Travel Loans: Finances for vacations and travel-related costs
  

• Home Renovation Loans: Covers expenses for home improvements
  

• Medical Loans: Addresses unexpected medical bills
  

• Debt Consolidation Loans: Combines multiple debts into a single loan
  

• Education Loans: Funds for higher education expenses
  
  

Once you understand the different types of personal loans, you can make an informed decision and opt for an option that suits your needs.

Before applying for a personal loan, you should evaluate a few key factors to ensure it suits your financial needs. This helps you avoid repayment stress and choose the right option based on your profile.

• Interest Rate: Compare rates across issuers to reduce your overall cost

• Repayment Tenure: Choose a tenure that keeps your EMIs manageable

• Processing Fees: Check upfront charges and other applicable fees

• EMI Affordability: Ensure the EMI fits within your monthly budget

• Credit Score: A good score can improve approval chances and interest rates

• Loan Amount: Borrow only what you need to avoid unnecessary debt

You can get a personal loan quickly, often within a few hours to a few days, depending on the issuer and your eligibility. If you meet the basic requirements and have all documents ready, some lenders offer instant approval and same-day disbursal. However, timelines may vary based on verification checks, loan amount, and your credit profile.

Personal loans offer flexible financing for diverse needs, but their interest rates can vary significantly based on your creditworthiness. Thoroughly compare lenders and understand the full terms before committing, ensuring responsible borrowing for a smooth financial journey. Before applying, you can check the various offers available on Bajaj Markets, provided by 20+ loan providers in India.