Frequently Asked Questions (FAQs) About Personal Loans
Without further ado, let us dive into the Personal Loans FAQ.
Q1. What is a personal loan?
Answer: A personal loan is an unsecured loan that you can borrow from a bank or a financial institution online or offline at the lender’s office. The money from the loan is typically used for various personal expenses, such as debt consolidation, medical bills, home improvements, or vacations.
Q2. How does a personal loan work?
Answer: When you apply for a personal loan, the lender assesses your creditworthiness and financial situation. If approved, you receive a lump sum of money, which you repay in fixed monthly instalments over a specified term. Personal loans usually have floating interest rates that change with the repo rate which is the rate at which the RBI lends to banks in India.
Q3. What is the difference between secured and unsecured personal loans?
Answer: Secured personal loans require collateral, such as land, property, assets such as your car or fixed deposits or stock or insurance, to back the loan. Unsecured personal loans do not require collateral but may have higher interest rates as the bank assumes greater risk. This is the same reason why credit cards have such high interest rates.
Q4. How do I qualify for a personal loan?
Answer: Qualification criteria vary by lender, but they typically include a minimum credit score, stable income, and a low debt-to-income ratio. Lenders may also consider your employment history and existing financial obligations. In most cases, a balance of at least around 30-40% of your income after meeting your existing EMIs means you can repay another loan.
Q5. What is the minimum credit score required for a personal loan?
Answer: The minimum credit score varies by lender but is generally around 750 to 900 for a good chance of approval. Higher credit scores often lead to better loan terms and lower interest rates. A person with a score of 830+ has a good chance of being approved if she applies for a loan.
Q6. How do I apply for a personal loan?
Answer: To apply for a personal loan, follow these steps:
- Research and compare lenders
- Gather necessary documentation (KYC, proof of income, etc.)
- Fill out the application online or in person
- Wait for the lender’s decision
- If approved, review and sign the loan agreement
Q7. How long does it take to get approved for a personal loan?
Answer: Approval times vary by lender. Some online lenders offer instant decisions, while traditional banks may take several days to process your application.
Q8. How much can I borrow with a personal loan?
Answer: The loan amount depends on your creditworthiness, income, and the lender’s policies. Personal loans typically range from around ₹25,000 to lakhs. Again, this range varies from lender to lender. Smaller institutions such as micro-lenders may even approve loans of ₹1,000 or less, while larger banks may not offer anything below ₹50,000.
Q9. What is the interest rate on a personal loan?
Answer: Personal loan interest rates vary widely, depending on factors like your credit score and the lender. Rates can range from single digits to even over 30%. Having a good credit score generally helps you secure a lower interest rate. As a thumb rule expect a rate between 10-18% if you have a good credit score and a higher interest rate if you have a bad credit history.
Q10. How long do I have to repay a personal loan?
Answer: Loan terms typically range from one to seven years, but some lenders offer shorter or longer terms. The term you choose affects your monthly payments and the overall cost of the loan.
Q11. Are there any fees associated with personal loans?
Answer: Yes, personal loans usually come with fees such as processing fees, late payment fees and even prepayment penalties. You should read the loan agreement carefully to understand the fees you may have to cough up.
Q12. Can I use a personal loan for any purpose?
Answer: Yes, personal loans are versatile and can be used for various purposes, including debt consolidation, home improvements, medical bills, marriage expenses, education expenses (in this case, we suggest an education loan) and more.
Q13. What happens if I cannot repay my personal loan?
Answer: If you miss payments or cannot repay the loan, it can negatively impact your credit score, and the lender may charge late fees or initiate collection efforts. It is important that you communicate with the lender if you are facing financial difficulties to explore potential solutions.
Q14. Can I pay off a personal loan early?
Answer: Yes, most personal loans allow for early repayment without prepayment penalties. Paying off your loan early can save you money on interest. This is true even if you have to pay a prepayment fee.
For instance, if the interest due is more than the prepayment and other fees, then you should prepay the loan. In case it is not, then do not prepay the loan. Continue with the EMIs instead.
Q15. Will taking a personal loan affect my credit score?
Answer: usually applying for a personal loan may cause a temporary dip in your credit score due to the credit inquiry but that is nothing much to worry about. Making timely payments on the loan can positively impact your credit score over time and even raise it beyond what you had before you applied for the loan.
Q16. How can I compare personal loan offers from different lenders?
Answer: To compare loan offers effectively, consider the interest rate, loan amount, loan term, and any associated fees. Use online calculators to determine the total cost of the loan and monthly payments for each offer.
And that is it for now.
Remember that personal loans should be used responsibly. It is essential to choose a loan that aligns with your financial goals and capabilities. If you have specific questions about a personal loan, it is advisable to consult with a financial advisor or the lender directly.
If you want to apply for a loan online, you can do so by clicking this link.
We hope this Personal Loans FAQ helped. Let us know if you have any other queries and we will try to address the same.