PERSONAL LOAN:
DEFINITION, TYPES, AND HOW TO GET ONE
Prepared By: AmyIntroduction
When you need cash, there are several reasonable ways to get it.
You may be able to get a small loan from family or friends, and you can always apply for a credit card. But, there's another option to consider that comes with certain advantages: a personal loan. While personal loans may have gotten a bad rap in some circles, they can offer a predictable way to borrow money.
I. What Is a Personal Loan?
A personal loan is money you borrow from a bank, credit union, or online lender that you repay with interest over a set period of time. Personal loans are instalment loans, like mortgages and car loans. In other words, all the money is issued up front and you repay the loan with fixed payments over a predetermined loan period.
Unlike many other types of instalment loans, however, unsecured personal loans are standard, like credit card debt. That means you don't need to provide any collateral. Average personal loan interest rates tend to be higher than the rates on secured loans but lower than credit card interest rates.
How do personal loans work?
Personal loans let you borrow a predetermined amount of money with a fixed interest rate and a fixed repayment period. They also come with fixed monthly payments that you agree to ahead of time, which makes budgeting for your loan a whole lot easier.
How can a personal loan be used?
While you can take out a personal loan for any reason (or no reason at all), these loans are popular for consumers who need to borrow money for a specific reason. Let's say you want to remodel your kitchen but don't have the $30,000 the project requires or enough home equity to qualify for a home equity loan or home equity line of credit (HELOC). In that case, a personal loan could offer the money you need for your project provided your credit was good enough to qualify.
Personal loans are also popular to consolidate debt, and it's easy to see why. Imagine you're a consumer with high-interest credit card debt that's sucking your budget dry every month. A personal loan could help you consolidate that debt at a lower interest rate while securing a predictable monthly payment and a set payoff date that doesn't change.
II. How a Personal Loan Works
Credit cards aren’t the only option when it comes to financing purchases or consolidating debt. Personal loans are a popular choice thanks to digital offerings that make it easy to apply and get approved.
But before you sign on the dotted line, you have to make sure a personal loan is right for you. To do that, you have to understand the inner workings of this borrowing tool. You don’t want to end up with an expensive loan you didn’t understand or one you’re ill-equipped to pay back.
Rewind ten years when consumers had fewer options when it came to borrowing money. They could use a credit card, which usually meant paying high interest rates, or apply for a bank loan, which was hard to get without top-notch credit. The 2008 recession changed that.
With little in the way of consumer lending being done by the banks, a crop of financial technology startups (or FinTechs) emerged to offer consumers personal loans. Using different underwriting data and algorithms to predict risk, they created a market that’s now booming.
According to TransUnion, the credit scoring company, unsecured personal loans reached $138 billion in 2018, an all-time high, with much of the growth coming from loans originated by FinTech companies. The average loan size in the fourth quarter of 2018: $8,402. Fintech loans account for 38% of the overall activity in 2018; five years ago, it was just 5%.
How Personal Loans Work
Personal loans come in many flavors and can be secured or unsecured. With a secured personal loan, you have to offer up collateral or an asset that’s worth something in case you can’t pay the money you owe back. If you default, the lender gets that asset. Mortgages and auto loans are examples of secured debt.
With an unsecured loan, the most common type of personal loan, you aren’t required to put up collateral. If you don’t pay back the money the lender can’t garnish any of your assets. That’s not to say there aren’t repercussions. If you default on an unsecured personal loan it will hurt your credit score, which raises the cost of borrowing, in some cases dramatically. And the lender can file a lawsuit against you to collect the outstanding debt, interest and fees.
Unsecured personal loans are typically used to finance a big purchase (such as a wedding or vacation), to pay down high-interest credit card debt or to consolidate student loans.
Personal loans are issued as a lump sum which is deposited into your bank account. In most cases, you’re required to pay back the loan over a fixed period of time at a fixed interest rate. The payback period can be as short as a year to as long as ten years and will vary from one lender to the next. For example, SoFi, an online lender, offers personal loans with terms between three and seven years. Rival Marcus by Goldman Sachs offers loans with terms from three to six years.
Borrowers who aren’t sure how much money they need can also take out a personal line of credit. This is an unsecured revolving line of credit with a predetermined credit limit. (In that respect, it’s a lot like a credit card.) The interest rate on a revolving line of credit is typically variable, meaning it changes with the prevailing interest rate in the market. You only pay back what you draw down from the loan plus interest. Lines are commonly used for home improvements, overdraft protection or for emergency situations.
Your Credit Score Dictates the Cost to Borrow
When weighing whether a personal loan makes sense, you have to consider your credit score. It’s a number ranging from 300 to 850 that rates the likelihood of you paying back your debt based on your financial history and other factors. Most lenders require a credit score of 660 for a personal loan. With credit scores lower than that, the interest rate tends to be too high to make a person loan a viable borrowing option. A credit score of 800 and above will get you the lowest interest rate available for your loan.
In determining your credit score a lot of factors are taken into account. Some factors carry more weight than others. For example, 35% of a FICO score (the kind used by 90% of the lenders in the country) is based on your payment history. (More FICO facts are here.) Lenders want to be sure you can handle loans responsibly and will look at your past behavior to get an idea of how responsible you’ll be in the future. Lots of late or missed payments are a big red flag. In order to keep that portion of your score high, make all your payments on time.
Coming in second is the amount of credit card debt outstanding, relative to your credit limits. That accounts for 30% of your credit score and is known in the industry as the credit utilization ratio. It looks at the amount of credit you have and how much is available. The lower that ratio the better. (For more, see The 60 Second Guide To Credit Utilization.) The length of your credit history, the type of credit you have and the number of new credit applications you have recently filled out are the other factors that determine your credit score.
Outside of your credit score, lenders look at your income, work history, liquid assets and the amount of total debt you have. They want to know that you can afford to pay the loan back. The higher your income and assets and the lower your other debt, the better you look in their eyes.
Having a good credit score when applying for a personal loan is important. It not only determines if you’ll get approved but how much interest you’ll pay over the life of the loan. According to ValuePenguin, a borrower with a credit score between 720 and 850 can expect to pay 10.3% to 12.5% on a personal loan. That increases to between 13.5% and 15.5% for borrowers with credit scores from 680 to 719 and 17.8% to 19.9% for those in the 640 to 679 range. Under 640 and it will be too cost prohibitive even if you can get approved. Interest rates at that level range from 28.5% to 32%.
There’s A Trade-Off
Personal loans can be an attractive way to fund a big purchase or get rid of credit card or another high-interest debt. Terms are flexible, allowing you to create a monthly payment that fits into your budget. The longer the term, the smaller the monthly payment.
But there’s a trade-off. You pay interest for a longer period. What’s more, the personal loan interest rate increases the longer the term of your loan.
Take a personal loan from SoFi as an example. On a $30,000 loan, a borrower with the best credit will pay 5.99% for a three-year loan. That jumps to 9.97% for a seven-year loan. At Citizens Financial Group the interest rate is 6.79% for a three-year loan and 9.06% for a sevenyear loan. At LightStream, a unit of SunTrust Bank, the interest rate on a three-year loan starts at 4.44%. For seven years, expect to pay 5.19% in interest.
In addition to the interest rate, some lenders charge a loan origination fee, which is the cost to process your application. That can make the cost of borrowing more expensive. The good news: origination fees are starting to disappear, particularly on digital platforms. Some of the online lenders that don’t charge borrowers origination fees include SoFi, LightStream, Marcus
By
GoldmanSachs and Earnest. All require at least a 660 credit score. When shopping for a
personal loan, compare the annual percentage rate or APR. It includes the interest rate and fees to give you the full picture of how much you’ll pay
If you have a good credit score, a personal loan is a reasonable option to finance a big purchase or consolidate debt. If your credit score is less than stellar, paying a higher interest rate may be worth it if it means getting yourself out of even higher rate debt. Before you make the leap do the math. Consider the interest rate, fees and terms. If you end up paying thousands of dollars to consolidate your debt, it’s not the best option for you.
III. Different Types Of Personal Loans In Delhi NCR
Delhi, which acts as the nation’s capital and economic hub, is one of the most expensive cities in India. Living costs in Delhi are significantly higher than in other cities. Yet, this urban powerhouse is home to millions of salaried, self-employed, and government employees.
Most people create financial plans to achieve both short- and long-term goals. However, unanticipated events might occasionally lead to financial problems. Through a straightforward approach, loans in Delhi are made simple to obtain. As a result, they are the quickest option if you need more resources to provide as collateral.
Which personal loan products are available in Delhi NCR?
The following personal loan types are available in the city:
Marriage loan:
A marriage loan is provided if you lack the funds to pay for your wedding. The interest rates on these loans are more excellent during the peak wedding season. Each loan has a value between $1,000 and $25,000.
A three- to seventy-two-month loan repayment period.
A simple procedure for recording.
Vacation loan:
You ask for a vacation or holiday loan when you require funds to pay for an upcoming vacation. Your income level and credit rating determine the loan amount.
Simple and quick documentation process.
A maximum loan amount of Rs. 40 lakh and a flexible loan repayment plan that can be extended.
Loan for a festival:
A loan for a celebration is taken to cover the expenses related to enjoying a festival. On this, banks typically have a borrowing limit of Rs.50,000
Loan for renovation:
This loan gives you the funds you need to repair your home. Funding money for home renovations might increase the selling price of your house.
Thirty years or over to repay a loan .Interest rates that are less than 6.85% annually.
Top-up loan:
Top up loan is a money you can get in addition to a personal loan you currently have. For example, you could select a top-up loan if you have a private loan already yet still require one.
Bridge loans:
You can ask for a credit facility if you only require money for a limited period. These loans have brief terms and high-interest rates. For some, you may need to erect security.
Agricultural loan:
A sort of financial aid offered to farms and other agriculturalists is an agricultural loan. These loans are only meant for people who work in agriculture. They have more farmer-friendly features, affordable borrowing rates, and flexible payback options.
Pension loan:
Retirees who also get a pension are given a retirement loan. It helps you get the money you need to survive financial difficulty.
A loan is of between Rs. 25,000 and Rs. 14 lakh.
Maximum loan repayment term is of 60 months.
The reduced interest rate might be as low as 11.70% per year.
Education Loan:
Numerous financial organizations offer personal loans that may be applied toward schooling. The student loan can pay for everything from your child’s education to supplementary academic needs.Only 6.35% per year in interest is charged on loans of up to 20 lakhs rupees.
Loan for a personal computer:
This loan can be used to purchase a desktop or a laptop. In recognition of the importance of computers in modern life, banks provide specific loans to assist clients in purchasing computers for themselves. In addition, many organizations provide small loans that can be used to buy software.
You can obtain a customized loan, as the name implies, for any monetary objective. They need less paperwork and are approved more quickly than other loans. You should receive the funds 2 to 5 days after completing the short application process.
Qualification Requirements for Salary People’s Personal Loans:
• The applicants must be older than 21.
• At loan maturity, candidates may be at least 60.
• Minimum Length of Employment: 2 Years, with 1 Year at Current Employer
• Minimum monthly earnings: between 7,500 and 15,000 rupees
• The candidate needs to be at least 25 years old for self-employed professionals and business people.
• The Max candidate limit at loan maturity is 65 years old.
• A minimum business period is between two and three years in the present industry or business.
• The minimal annual income is Rs. 1 lakh.
Please be advised that there are different eligibility restrictions for each bank.
IV. What Is the Difference Between a Cash Advance Loan and a Personal Loan?
A payday loan is a short-term loan intended to be repaid by your next payday. They are easy to apply for but charge high-interest rates and often have hidden fees. This makes it very easy to get stuck in a debt trap where it becomes very difficult to pay off your loan, even if you only borrowed a small amount to begin with. Conversely, a personal loan is a little more complicated to apply for but has much lower interest rates than payday loans. Because of this, personal loans are often used to consolidate debt and are a far safer way to access credit.
Here's what you need to know about the differences between these loans and how you can decide which is best for you.
Payday Loans vs. Personal Loans: An Overview
Payday loans and personal loans have some similarities. With both loans, you borrow money that must be repaid with interest at some future date. Both loans can be used to cover emergencies and to meet the cost of unexpected bills or other financial obligations.
These loans can differ significantly. Payday loans are generally used to borrow small amounts of money until your next paycheck and are very easy to arrange. You won’t need any collateral for these loans, and they can be very expensive. Because of this, they are often considered predatory lending, since they carry extremely high-interest rates, do not consider a borrower’s ability to repay, and have hidden provisions that charge borrowers added fees.
Personal loans are a much broader category. This loan is typically offered by a bank, credit union, or online personal loan lender, and you will normally need to provide them with proof that you can eventually repay the loan. Personal loans are normally for much larger amounts of money than payday loans, but you will have much longer to repay this money. The interest rates and fees for a personal loan are much lower than for a payday loan, so the overall cost of borrowing is likely to be much lower.
How Payday Loans Work
It’s normally very easy to get a payday loan. You can walk into a payday lender’s office and walk out with a loan. You will not have to give anything to the lender in order to secure the loan, as you would at a pawnshop. Instead, the lender will normally ask you for permission to electronically take money from your bank, credit union, or prepaid card account. Sometimes, the lender may ask you to write a check for the repayment amount, which the lender will cash when the loan is due.
How Personal Loans Work
To get a personal loan, you need to apply to a lender. This can be a bank, credit union, or online personal loan lender. The lender reviews your application and decides whether to approve or deny it. If approved, you’ll be given the loan terms, which you can accept or reject. If you agree to them, the next step is finalizing your loan paperwork.
When that’s done, the lender will fund the loan, which means paying you the proceeds. Depending on the lender, these may arrive through a direct deposit into your bank account or by check. After the loan is funded, you can use the money as you see fit.
Key Differences
There are several key differences between payday loans and personal loans when it comes to meeting emergency expenses:
Cost: Payday loans generally have much higher rates of interest than personal loans and may hit you with hidden fees and charges.
Accessibility: Payday loans can be easier to arrange, especially for people with limited credit history and other financial challenges. With some payday lenders, you can even get a loan without a bank account as long as you have a prepaid card account.
Impact on your credit score: Most payday lenders don’t report to the credit bureaus.
Consumer Financial Protection Bureau. "I Heard That Taking Out a Payday Loan Can Help Rebuild My Credit or Improve My Credit Score. Is This True?"
This means that only personal loans show up on your credit report. If you take out a personal loan and make payments on time, your credit score will climb, which will help you qualify for better loans and interest rates in the future.
V. What Are the Benefits of Obtaining a Personal Loan?
Explore the benefits of availing of a personal loan and find out how it can assist you in accomplishing your financial objectives.
We rarely have the chance to fulfil our small desires and aspirations in our fast-paced lives. For instance, you might have always wanted to renovate your home or take your family on a trip to a foreign country. But due to financial limitations, we put our aspirations on hold.
Personal loans might be of great assistance in this situation. These loans are unsecured and can be used for a wide range of purposes, including paying for unforeseen medical expenses, planning a lavish wedding, or renovating your house. There are several non-banking financial companies (NBFCs) and banks in India that offer affordable personal loan interest rates with minimal documentation requirements.
Here are some of the benefits of taking out a personal loan:
No collateral is required
You are not required to put up any asset as collateral for the loan amount, unlike with a secured loan like a home or auto loan. People who lack collateral or are unwilling to put their
assets at risk can receive personal loans more easily. Additionally, since there is no need for asset verification or value, the personal loan verification process is faster and more convenient as there is no collateral requirement.
Large loan amount
One of the main benefits of applying for a personal loan is the size of the loan amounts offered to borrowers. Depending on the lender and the borrower’s creditworthiness, personal loans offer large loan amounts. This is an appealing choice for those who require a sizable sum of money for personal use.
Rapid disbursal
Personal loans are processed and issued more quickly than other sorts of loans. It is therefore a well-liked choice for those in urgent need of money. Personal Loans can be disbursed quickly, typically within 24 hours* after approval. This makes it the finest option for taking care of unforeseen or urgent expenses without breaking a sweat.
Hassle-free documentation
Minimal documentation is one of the biggest advantages of personal loans. All supporting paperwork for online applications is digital. The necessary documentation can be uploaded along with your application form. The entire procedure is paperless. Financial institutions need documentation of your age, address, salary slips, income tax returns, credit history, and so on for the application procedure.
Convenient tenures
Personal loans often have relatively flexible repayment terms, making it easy for borrowers to pay off their debt. Personal Loans are a well-liked choice because of the flexible repayment options they provide. For their loans, customers can choose a duration that ranges from 6 to 96 months. This can be the best choice for people who seek more freedom and flexibility in their repayment arrangements.
In times of financial emergencies, a Personal Loan can provide a reliable and secure solution to cover big or small expenses. You can conveniently calculate your monthly payments using the online personal loan EMI calculator, which requires only basic inputs such as loan amount, repayment tenure, and personal loan interest rate. You have the flexibility to adjust the monthly payment and loan tenure to suit your budget, and the calculator displays a detailed breakdown of the principal and interest amounts.
Conclusion
The wide variety of personal loans currently available makes it almost a guarantee that there's an offer out there suited to your financial needs. However, it's easy to get overwhelmed by the sheer number of options on the market, which may lead you to inadvertently missing out on the most favorable interest rates and loan terms you might qualify for. For this reason, it's
crucial to carefully research and compare different lenders and loan products. By taking the time to find the best possible loan, you can keep your monthly payment low while also reducing your risk of default.
Reference:
What Is a Personal Loan? | Investopedia , 14 September, 2023
https://www.investopedia.com/personal-loan-5076027
How can a personal loan be used?| businessinsider, 14 September, 2023
https://www.businessinsider.com/personal-finance/how-do-personal-loans-work?IR=T
How Do Personal Loans Work?| forbes, 14 September, 2023
https://www.forbes.com/advisor/personal-loans/how-do-personal-loans-work/ DIFFERENT TYPES OF PERSONAL LOANS IN DELHI NCR| vintagefinance, 14 September, 2023
https://blog.vintagefinance.in/diffrent-types-of-personal-loans/ Payday Loans vs. Personal Loans: What’s the Difference?| Investopedia, 14 September, 2023
https://www.investopedia.com/payday-loans-vs-personal-loans-5214282
Top 5 benefits of getting a personal loan | thehindubusinessline, 14 September, 2023
https://www.thehindubusinessline.com/brandhub/top-5-benefits-of-getting-a-personalloan/article66915705.ece