What Is A Personal Loan?
A kind of unsecured loan, which is useful for meeting your current financial requirements, is referred to as a personal loan. A borrower need not have to furnish any kind of collateral or security while applying for a personal loan. Plus, your lender offers you the necessary flexibility for using the finances according to your specific requirement.
A personal loan can act as a solution for managing your wedding expenses and travel costs, as well as, meeting the expenses for a medical treatment, debt consolidation, home renovation, for going on an expensive vacation, and much more. An individual may apply for a personal loan up to any amount, which makes it different from other types of loan. A borrower has typically complete freedom to spend the money for whatever purpose they want.
Another salient feature of personal loans is it can be sanctioned by banks with minimal documentation that has made it immensely popular in recent years. As mentioned earlier, the funds received from a personal loan can be used toward any kind of legitimate financial requirements.
At the same time, similar to any other loan from a bank or a financial institution, a borrower has to repay it according to the terms and conditions agreed upon with the banks. Typically, the repayment terms can stretch from some months to even a few years. Usually, loans are repaid in equated monthly installments.
Personal loans function in a similar way like a majority of other types of loans. A borrower needs to submit a loan application and furnish the necessary documents. Thereafter, the concerned bank will check their credit rating/credit score and decide whether they can sanction the loan application or not. When a borrower accepts the bank offer, the bank transfers the funds to the former’s bank account so that it can be used the way they like. The borrower has to repay the personal loan in EMI or equated monthly installments that are based on some factors such as interest rate, tenure, and loan amount.
Personal loans – attractive features
- Absence of collateral
Personal loans are “unsecured loans”, which means a borrower does not have to offer any kind of security to a lender in any form – shares, cash or any other kind of assets. Thus, a personal loan appears more alluring to some people who may not have the necessary means to collect the cash needed as collateral.
- Full flexibility to spend the funds sanctioned
The bank does not impose any kind of limitations on the ways in which borrowers should spend their loan amount. In contrast, the amount sanctioned by the bank as an auto loan or a home loan has to be only used for vehicle or property respectively. On the other hand, personal loans enable the borrower the liberty to spend the money for any purpose they want to.
As mentioned earlier, the loan amount can vary from some thousands to a few lakhs. However, when a borrower applies for a personal loan, their application amount should not be higher than their capacity to make repayments. However, the final approved loan amount will be based on the criteria followed by a nonbanking financial institution/bank and the way they evaluate the borrowers’ ability to repaying the loans.
Key merits of the personal loan
- There is no restriction on ways a borrower can spend the loan amount
- Quite quick in relation to other types of loans as they do not need plenty of documentation like an auto or a home loan
- No need for any collateral. Thus, when a borrower does not possess any assets such as gold, shares, or home as security. It is the most convenient alternative when a person who is in need of funds immediately.