Personal loans explained: What they are, and how to use them wisely

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Personal loan is a non-collateral loan which you may take for any purpose—medical bills, home renovation, education, or marriage. Since it is not a collateral loan, banks or NBFCs consider your credit score and income prior to sanctioning. Sanctioned amount, interest rate, and repayment period are subject to your creditworthiness, which is typically ₹50,000 to ₹25 lakh or higher.

Advantages of personal loans

The major advantage of taking a personal loan is immediate access to money without committing any assets. Most personal loans are disbursed within 24 to 48 hours. You even get the option of choosing the time period in which you wish to pay back the loan, usually in the range of 1 to 5 years. Based on the high credit score, you can negotiate a reduced rate of interest, which can be less than credit cards borrowing in some cases.

Disadvantages to be noted

The only negative is the high interest, i.e., between 10% and 24% per year. As these are not secured loans, lenders offset the risk by charging higher interest. Non-payment of EMI works to your disadvantage, as your credit score can get negatively affected and it also attracts penalties. One also needs to pay the processing fees and prepayment fees by certain banks if you decide to repay the loan earlier than the agreed period.

If you fail to pay in time

Foreclosure is prepayment of the loan before expiry of the agreed period. While it can help you save interest, some banks impose a penalty of up to 5% of the outstanding principal value. Not every lender allows foreclosure in the initial 6 months. Read the terms and conditions carefully before choosing early closure of your loan.

Repayment and EMIs

Repayment is typically done via Equated Monthly Instalments (EMIs), both principal and interest of which are covered. You can determine your monthly EMIs via a personal loan EMI calculator. Choosing a longer tenure lowers EMI but increases the overall interest. Make sure the EMI is viable on your monthly pocket to prevent default.

FAQs

1. Does having a personal loan affect my credit score?

Yes. Your credit score may fall a little due to the hard pull. But timely payment will help it in the future.

2. Is business or investing in stocks possible with a personal loan?

Technically yes, but not recommended. Personal loans carry steep interest and should be used for emergency or planned spending on you yourself—not investments.

3. Can I borrow another personal loan while repaying another?

Yes, but that would be subject to your income level and repayment history. Lenders would take into account your existing debt load and ability to service yet another EMI before lending.