A Personal Loan is a product where you borrow a certain amount from any lender and repay them within the fixed repayment tenure. The amount, repayment tenure, and interest rates are decided by the lender based on the credit profile of the borrower. A Personal Loan can work as a straw in your financial drowning situation. So, what is a Personal Loan? How Does it work? How can you get one? Here, you will get the answers to these questions and many more like this. So, keep reading if you want to have a comprehensive knowledge of Personal Loan. 

What is a Personal Loan?

A Personal Loan is an unsecured type of loan where an individual borrows certain amounts from any Bank, NBFC, or other Financial Institution. They are an unsecured loan, so they don’t require any security or collateral. Various features of this loan, such as loan amount, interest rates, repayment tenure, etc., are determined based on the borrower’s creditworthiness. 

How Does a Personal Loan Work?

A personal loan works by providing individuals with a lump sum of money that they can use for various personal expenses and repay within the given repayment tenure, keeping the interest rates in mind. Let’s break down the steps for you:

• Personal Loan Application Submission
• Eligibility and Credit Check of the Borrower 
• Loan Approvals 
• Disbursements 
• Repayment terms 
• Monthly Payments 
• Prepayment and Penalties
• Use of the Loan for Various Reasons
• Completion of the Loan  

Features of a Personal Loan 

• Loan Amount: This is the fixed amount that the borrowers get from the lender. This amount is based on the creditworthiness and income of the borrower. 
• Interest Rates: The interest rate is the cost of borrowing the money and is expressed as an annual percentage rate (APR). Personal loans may have fixed or variable interest rates.
• Loan term: This is a pre-determined tenure the borrower must follow to repay the loan amount. This can also be manipulated based on the creditworthiness and income of the borrower.
• Repayment Schedule: In the repayment schedule, the lenders outline the frequency and amount of each borrower’s payment to repay the loan. The payment frequency is generally monthly; the rest of the element can be customised accordingly. 
• Fees and Charges: Apart from Interest Rates, there are several other charges on a Personal Loan, such as processing fees, application fees, late repayment fees, etc. 
• Credit Check: This is an inquiry credit history check of the borrower run by the lenders to ensure their repayment capabilities. 
• Early Payment Options: Various lenders offer early or pre-pay options on their personal loans. With this, the borrower can repay their borrowed amount even before the completion of the repayment tenure. A few lenders also put charges on closing the loan early. 

What are the Required Documents 

The required documents to apply for a personal loan differ from lender to lender. However, here are the generally required documents by the majority of lenders. 

For Salaried Individuals

• KYC Documents
• Last 3 months’ salary slip
• Form 16 of last 2 years
• Income Tax Return if any of the last 2 Years
• Last 3 months’ bank statement if the salary is directly credited to the bank account
• Certificate of employment from current employer

For Self Employed Individuals

• KYC Documents
• Income tax returns of the previous 2 years
• Statement of finances with a proper balance sheet mentioning all the profit and loss 
• Bank statement with continuity of business
• GST registration evidence of business

What are the Eligibility to Apply for a Personal Loan

• The age of the applicant must be between 21 to 60
• The applicant must be having a stable monthly income. 
• The minimum required CIBIL Score of the applicant must be 700
• The applicant must have a minimum 3 months of job continuity
• Salaried employees, self–employed professionals, self–employed nonprofessionals, and private limited companies are eligible