What is a personal loan? A comprehensive guide for first-time borrowers | Mint

Personal loan loans are flexible financial options that can be availed in pursuit of different goals of life such as paying an emergency medical bill, funding home improvements or realising that special dream vacation. Before getting into the world of personal loans, however, one needs to get a gist of the basics.

Understanding personal loan

A personal loan is a type of unsecured loan where you can borrow a specific amount of money for personal purposes. Personal loans, unlike secured loans, do not demand any collateral. Due to this reason, more people become eligible to receive a personal loan. People can use personal loans to achieve:

• Home improvement: Improving or repairing a home.
• Medical emergencies: Save for unexpected medical bills or treatments.
• Education: Pay for their student tuition and other education expenses.
• Weddings: Cover wedding-related expenses.
• Travel: Save for that long-waited holiday or breakaway.

They offer fixed interest rates and fixed loan repayment lengths, which makes them straightforward with estimated monthly payments over the life of the loan.

Key features of personal loans

1. Flexibility: The major advantage of the personal loan is that it’s very flexible. You can use the cash for almost any personal need, whether it’s a wedding, medical bills, vacation, education, or even jewellery and technology purchases. In short, it is an easy way to bridge cash shortages.

2. Fast disbursement: Most personal loans are approved and disbursed within a very short period. Depending on the lender, cash is generally disbursed within 24 to 72 hours, making it a very suitable choice for pressing financial needs.

3. Minimal paperwork: Personal loans are relative in terms of the amount of paper-work required. With most lenders now allowing web-based applications, the whole process is easier, and you can get loans fast and with minimal hassle.

4. No-collateral required: Personal loans are unsecured, thus no collateral needs to be put up. This means that your assets and properties are safe. This aspect is particularly helpful for borrowers who do not have substantial assets or else wish that their property would not at all be risked.

5. Repayment options: Flexible repayment options are available from equated monthly instalments (EMIs) to cheques dated and bank online payment gateways. Loan tenors vary between a few months to many years. You can choose the tenure option according to your economic condition. Longer tenures will have lower EMIs, whereas short durations will have higher EMIs.

Important factors to consider before taking personal loans

1.Loan terms and conditions: Before taking a personal loan, always read the fine print. Everything regarding interest rates, repayment time lines, processing fees, or other charges on the loan should be acknowledged. It’s only by being well aware of the agreements that no unwarranted charges will pop up on you later.

2. Credit score: It is yet another important requirement that determines whether you will be eligible to receive the personal loan. The higher the credit score, the more likely you are to get accepted on good terms, such as the lending rate. If it is your first loan, you are recommended to check your credit score before applying, if it is low, try to boost the credit score before applying.

3.Loan amount: Never borrow more than you need, you may end up in unnecessary debt. Use a prepayment EMI calculator to find out how much loan amount at what repayment period you can afford for your budget.

4. Compare loans: Compare loans from multiple banks and financial houses. Based on the interest rates, processing fees, repayment plan, or early repayment charges, they may differ among them. That helps to discover the best price according to your budget.

5. Payback conditions: Understand payback conditions clearly before availing the loan. Though most personal loans have pre-specified EMIs, you must know the repayment schedule, early repayment options, and consequences of a missed payment or defaulting on the loan.

In conclusion, a personal loan is an incredibly useful financial device when managed wisely. Versatile and fast approval, it can fill many of your financial demands, but personal loans must be entered into with caution. Find out the terms available for the loan, assess current situations, and choose the right lender. These decisions need to fit with long-term financial goals.