Personal loans have become quite common over the past few years and are now being used by a growing number of people to fund their purchases.
But what are personal loans, how they work, and what points you need to keep in mind while taking a personal loan? This blog post answers all these questions for you.
A personal loan is a money borrowed from a bank, NBFC (Non-banking finance companies) or an online lender for funding needs like a vacation, marriage, home renovation, etc.
Most personal loans are “unsecured”– means they don’t need collateral or security, and because of this have a higher interest rate than secured loans like a car or home loan.
Personal loans work like any other loan. You apply for the amount needed, submit the documents, the lender checks your credit-worthiness and makes an offer which details the amount you can get and the interest rate you will be charged. If you accept the offer, the money is transferred to your bank account, and you can use the money for anything you wish to.
The repayment is mostly through equated monthly installments (EMIs) and the EMI amount is calculated basis the amount you have taken, the interest rate and the tenure of your loan. Although this process looks straight forward, if you go to banks or other traditional lenders, it requires running around and a pile of paperwork each time you need a loan.
The biggest advantage of personal loan is that you can use the money in any way you wish. So be it wedding expenses, going on a vacation, paying for an unexpected medical emergency or home renovation. No matter what the case may be, personal loans come handy.
What should you know before applying for a personal loan?
If you have a good credit score, most of the lenders would be willing to offer you a personal loan, and at times it can be daunting to figure out which is the best option.
Here are 3 things you should know before taking a personal loan
The interest rate you are charged is the cost you pay taking the loan and can change your monthly installment amount substantially. Moreover, the interest rate is fixed for the entire loan period. So, spending some time and finding the best rate will save you a lot of money.
This is the period in which you need to pay off your principal amount plus the interest. A shorter loan duration means a lower cost; however, it means a bigger EMI. Look at tenure range being offered by different lenders and go for an option which gives the right mix of tenure and EMI.
When you get a year-end bonus or have extra money, the first thing comes into mind to repay your outstanding loan amount. However, the lender might charge a big penalty for the early closure. Therefore, you should check on the charges applicable on pre-payment before applying for a personal loan.