Simply put, it is an unsecured loan taken by individuals from a bank or a non-banking financial company (NBFC) to meet their personal needs. It is provided on the basis of key criteria such as income level, credit and employment history, repayment capacity, etc Unlike a home or a car loan, a personal loan is not secured against any asset. As it is unsecured and the borrower does not put up collateral like gold or property to avail it, the lender, in case of a default, cannot auction anything you own. The interest rates on personal loans are higher than those on home, car or gold loans because of the greater perceived risk when sanctioning them. However, like any other loan, defaulting on a personal loan is not good as it would reflect in your credit report and cause problems when you apply for credit cards or other loans in future.
There are 4 main types of personal loans available, each of which has their own pros and cons.
(a) Unsecured Personal Loan...
Unsecured personal loans are offered without any collateral. Lenders approve unsecured personal loans based on your credit score. A good credit score will make it easier to get approved. Because there is no collateral involved, these loans are riskier for lenders. They offset this high risk by imposing higher interest rates on unsecured loans.
(b) Secured Personal Loans...
Secured personal loans are backed by collateral. Lenders offer unsecured personal loans against your vehicle, personal savings, or any other valuable asset. If you default on your loan, the lender can seize whatever asset you’ve put up as collateral. Because the risk is lower, you will have a lower interest rate on these loans.
(c) Fixed-Rate Loans...
With fixed-rate loans, your interest rate and monthly payments stay the same throughout the life of the loan.
(d) Variable-Rate Loans...
With variable rate loans, the interest rate can rise or fall depending on prevailing market conditions. However, there is usually a cap on much the rate can change over a specified period of time. These loans usually have a lower APR as compared to fixed-rate loans. Variable-rate loans.
It can be used for any personal financial need and the bank will not monitor its use. It can be utilised for renovating your home, marriage-related expenses, a family vacation, your child's education, purchasing latest electronic gadgets or home appliances, meeting unexpected medical expenses or any other emergencies. Personal loans are also useful when it comes to investing in business, fixing your car, down payment for a new house, etc.
Most of the personal loans that are being offered in the country do require a borrower to fulfil a certain level of eligibility in order to avail the loan. The eligibility criteria simply determine the credit repayment capabilities and the past credit worthiness of the borrower. There are few abbreviations we will be using for further clarification like ROI, Tenure, PF, FCC etc . The same will be explained in common FAQs.
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