Money is a significant part of nearly every aspect of our lives and in some cases, unforeseeable circumstances require the funds. It might be a medical emergency, a wedding, home renovation, higher education or even consolidating debt, and many people find personal loans a fast and flexible way to go.
What is a Personal Loan?
A personal loan is a service of loaning money by how the institution with credit options (banks, non-banking financial companies (NBFCs), or online) is often decided by the recipient for a specified and fixed amount of money to be paid after a fixed time period typically after you receive an interest. Whereas loans are so specific as to the reason one is taking them–go buy a home (home loan) or buy a car (car loan), personal loan can be spent just about anywhere.
Personal loan To illustrate, suppose you require 2 lakhs to fund your sister’s wedding or to enable out-of-the-blue healthcare bills, a personal loan can provide you with that lump figure in just a matter of a few days. There is flexibility and this makes it popular.
Features of Personal Loans
1.Unsecured loan-Most personal loans are unsecured (i.e. not backed by property or gold). This renders them risk-free to the borrower but lenders take slightly higher interest rates.
2.Fixed term tenure -The tenure is typically 1 to 5 years, again depending on the lender.
3.Stable EMI– The cost the borrowers pay in ways of Equal Monthly Installments (EMIs) is known as the principal and the interest.
4.Fast turnaround time -Approval through digital banking and online loan apps can be in a matter of minutes.
5.Flexible usage – You can utilize it in any way but specific loans limit you to usages.
What is the process behind personal loans?
How does it work, step by step:
1. Application
This begins with an application with a bank or financial institution, whether online or offline. The documents requested by the lender will be quite simple documents like identity proof, income proof, address proof, and in some cases employment details.
2. Eligibility Check
Lenders consider your credit score, monthly pay, employment stability and ability to pay. A relatively high credit score (generally anything above 700) will make you more likely to get an easier approval and good rates.
3. Approval & Disbursement
After approval is given you will get the loan amount deposited right in your bank account. This varies with the lender but could be a number of hours or even days depending on the lending company.
4. Repayment
EMIs make it clear that the borrower has to repay the loan in EMIs as per the period. Every EMI will be the part of the principal sum as well as the interest. Failure to pay may damage your credit and attract fines.
5. Closure
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Once you pay all your EMIs your loan closes and you are financially free again. Prepayment or paying extra charges (paying off before the required date) is also permitted on some lenders.
Case to Comprehend More
Suppose you borrow a personal loan 1,00,000 at an annual interest rate of 12 percent and it will take 2 years. Your EMI can be something like 4,700. At the end of 24 months you would have paid up about 1,lakh 12 thousands (principal + interest). This demonstrates the accumulation of interest over periods of time, hence borrowing must be planned well.
Personal Loans Pros
•No security required
•Convenience and convenience
•Freedom to be used at the personal will
•Raises credit score when he or she pays on time
Drawbacks of a Personal Loan
•Lower rates of interest as compared to the secured loans
•Stiff repayment calendar and penalty in case of default repayment
•Possible risk of debt-trap when borrowed consumptively and not as part of the planning process
When to take Personal Loan?
Personal loan is viable if:
•You experience an actual emergency such as hospital bills.
•You desire to streamline the high-interest debt to one easy EMI.
•You require money to plan your expenses like travelling, education or home repair.
Nevertheless, it cannot be interpreted as unnecessary shopping and lifestyle upgrade since it causes financial burdens.
Conclusion
Personal loan is used as a financial instrument to offer fast financing without the inconvenience of security. It operates on an easy concept- you borrow a specified amount and pay it in monthly installment, including the interest. As much as it is one of the simplest methods of dealing with emergency expenditure, there should be careful plan creation.
The borrowed sum should be minimal and should be what you actually need, compare lenders offering the lowest rates and make repayments on time. Intelligently used personal loans are life solving and haplessly used personal loans are a financial taboo.