Ever wondered, what is a personal loan in India? Well, it’s your financial friend! A personal loan is like a magic wand that can be used for anything from planning a dream wedding to taking that much-needed vacation.
A personal loan is unsecured in nature which implies that you’re not required to pledge any assets as security for this loan. And what’s even better? Feel free to use it any way you like. So, with this freedom in hand, wouldn’t you want to know more options? That’s exactly what we are here for. The article’s focus is on the various types of personal loans in India.
What is a personal loan in India?
One kind of unsecured loan that banks and other lending institutions offer to borrowers is the personal loan. It’s unsecured because you don’t need to provide any collateral or security to avail it. Here are some key features:
Flexibility: Personal loans can be used for any purpose, from funding a holiday to paying for a wedding or even medical emergencies.
No collateral: As mentioned, personal loans usually come in unsecured form. In other words, you won’t need to put up any collateral to secure a loan.
Fixed interest rates: Interest rates on personal loans are often fixed, meaning they won’t fluctuate during the loan’s duration.
Fixed repayment period: Personal loans have a fixed repayment period ranging from 2 to 5 years, or even more in some cases.
Quick disbursal: Once approved, lenders quickly disburse personal loans, making them a good option for emergencies.
Please note that while most personal loans in India are unsecured, certain banks and non-banking financial companies (NBFCs) provide secured personal loans for specific purposes.
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Types of personal loans
Secured personal loans
Collateral, including real estate, savings accounts, or other assets, is used to support secured personal loans. The interest rates on secured loans are lower than on unsecured loans because the lender can use the collateral as security in case the borrower defaults.
The loan amount and interest rate are determined by the value of the collateral. People who own valuable assets and would like to borrow a larger amount of money can apply for secured personal loans.
A longer repayment term is a major perk of secured personal loans since it gives borrowers more time to pay them back. In addition, borrowers may find it easier to manage their finances with lower monthly instalments offered by secured loans.
However, it’s important to keep in mind that if the borrower defaults on the loan, the lender may seize the collateral and use it to cover the debt.
Unsecured personal loans
The term unsecured refers to a type of personal loan in which collateral is not needed. Borrowers’ creditworthiness, steady income, and work history are the three main factors that determine the approval of these loans. People who have a reliable income and excellent credit history are the ones most likely to be offered unsecured loans.
Since collateral is not required for an unsecured loan, the interest rate is normally higher than that of a secured loan.
The main advantage of unsecured personal loans is that they do not put any of your assets at risk. Even if the lender goes bankrupt, your house and other assets will be safe.
Additionally, unsecured loans have a quicker approval process and require minimal documentation. However, unsecured loans typically have a smaller loan amount for approval and a shorter repayment term than secured loans.
Fixed-rate personal loans
The interest rate on a fixed-rate personal loan remains constant for the whole term of the loan. What this means for borrowers is that they can plan ahead for their repayments because the monthly instalments won’t change. People who value consistency and want to make long-term financial plans might benefit from fixed-rate loans. These loans provide a hedge against market interest rate volatility.
One of the advantages of fixed-rate personal loans is that borrowers can accurately budget their monthly expenses since the instalment amount remains unchanged. Additionally, fixed-rate loans provide peace of mind, especially during economic uncertainty when interest rates may rise.
However, because fixed-rate loans provide borrowers with more security, they may have slightly higher interest rates than variable-rate loans.
Variable-rate personal loans
Interest on personal loans with a variable rate, also known as a floating rate, can change depending on the state of the market. A benchmark rate, such as the repo rate established by the Reserve Bank of India, is often used to tie the interest rate.
Variable-rate loans offer the potential for lower interest rates during periods of declining market rates, but they also come with the risk of higher interest rates if the market rates increase.
If market rates are favourable, borrowers of variable-rate personal loans may be able to take advantage of lower interest rates. Additionally, variable-rate loans may offer more flexibility regarding repayment options, such as the ability to make prepayments without any penalties.
However, borrowers should be prepared for higher monthly instalments if the interest rates increase.
Also read: The pros and cons of investing in floating-rate fixed deposits/
Debt consolidation loans
Consolidating multiple unsecured debts into a single, more manageable payment is the goal of debt consolidation loans, a specific kind of personal loan. With this personal loan, borrowers can streamline their finances and maybe even reduce their interest rates in the long run.
The borrower’s financial condition and creditworthiness determine whether the debt consolidation loan will be secured or unsecured.
The primary benefit of debt consolidation loans is the repayment plan they offer, which helps borrowers better manage their debts. Borrowers can save time and effort by consolidating their debt into a single loan, rather than having to keep track of different lenders and due dates.
However, before committing to a consolidation loan, make sure the terms are better than the current debts.
Wedding loans
Wedding loans are personal loans specifically tailored for wedding expenses. Indian weddings are known to be very expensive due to their extravagant nature. Borrowing money for a wedding allows people to pay for things like the reception site, food, decorations, and the bride’s dress, among other things.
One of the advantages of wedding loans is that they offer a quick and convenient financing option for couples who want to have their dream wedding without compromising on their budget. The interest rates and repayment periods for these loans are usually quite reasonable.
However, before taking out a loan, be sure the amount and repayment terms are manageable for your budget.
Education loans
Tuition, housing, books, and other educational expenditures can be easily covered with an education loan, which is a type of personal loan. Anyone wishing to pursue higher education, be it in India or abroad, can apply for one of these loans.
Borrowing money for school allows people to save for the future without worrying about how they will pay for it right now.
Student loans have several benefits, one of which is the ability to begin paying them back once the borrower has either finished their degree or found gainful employment. Furthermore, interest rates on education loans are typically lower than those on other personal loan types.
Also read: Mastering the maze: Your pathway out of student loan debt/
How to choose the right personal loan?
Your financial health depends on choosing the right personal loan among various personal loan options. When looking into personal loans, here are some things to keep in mind:
Interest rate: This is the cost of borrowing. As a general guideline, the lower the interest rate, the smaller the total repayment amount will be. Therefore, it’s beneficial to seek out loans that offer the most competitive rates.
Loan tenure: Your monthly EMI and total interest paid are affected by the loan’s duration. Choose a period that ensures affordable EMIs.
Processing fees: Applying for a loan with some financial institutions might cost you some money in the form of charges. Remember to include this in your budget estimates.
Prepayment penalties: Paying off your loan early might incur penalties, so it’s important to know about them.
Customer service: The loan process can be made more transparent and easy with good customer service.
Always remember that there are more things to think about than just the interest rate when picking a personal loan. The total cost, terms, and customer experience are some other things to think about.
Bottomline
An exciting and varied world awaits you in the realm of personal loans. From funding your dream vacation to making your home renovation a reality, personal loans in India are your financial superheroes. However, keep in mind that a great responsibility accompanies a great power.
So, choose wisely, borrow responsibly, and let your personal loan be the stepping stone to your financial dreams. Ultimately, it’s not merely about securing a loan, it’s about transforming your life!
