Key Things You Should Know About Personal Loans
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Personal loan is an unsecured credit option offered by banks and NBFCs to help consumers meet their personal and business related financial requirements. Both salaried and self-employed individuals can avail the loan without pledging any collateral and with fewer formalities and quicker processing time than other credit options. For those who need to know more, here are some of the key features and benefits of personal loans that everyone should know of.
 
No end-use restrictions on the loan proceeds
Secured credit options like car loans and home loans are availed for meeting specific financial requirements. However, in case of personal loans, there are no end-use restrictions. Borrowers can use the loan proceeds to cover any financial costs related to travel, wedding, home renovation, purchasing consumer durables like refrigerators, air conditioners, washing machines, etc. The loan can also be used for managing day-to-day expenditures, for covering planned and unplanned medical expenses and for consolidating multiple high-interest debts.
 
Fast loan approval and disbursal process
In personal loans, the loan approval and disbursal process is usually faster than in case of secured loan options. Many lenders disburse their personal loans within a few days from the date of application. However, with more and more lenders offering personal loans through an end-to-end online process, the turnaround time for personal loan disbursal has reduced from a few days to a few hours.
 
Pre-approved offers to select customers
Many lenders offer pre-approved personal loans to their existing customers having good credit profiles. Such offers usually come with instant or nearly instant disbursals and require zero to minimal documentation. If you need funds urgently, you can first reach out to the banks and NBFCs with whom you have your deposit, loan or credit card account(s) and check if they have a pre-approved offer for you. Besides checking with your lenders directly, you can also check for such offers on their respective net banking platforms or mobile applications. For example, existing customers of the State Bank of India (SBI) can check on SBI YONO app or its SBI net banking platform if they are eligible for such offers. If they are eligible, they can apply online for SBI personal loan through the YONO app or internet instantly at their convenience on 24*7 basis. Alternatively, those having stronger credit can also check and compare pre-approved personal loan offers from other banks and NBFCs through online financial marketplaces.
 
Fixed and floating interest rates
Most public sector banks offer personal loans on floating interest rates. Private sector banks and NBFCs, on the other hand, usually offer personal loans on fixed interest rates. In floating rate personal loans, the interest rates are linked to external benchmark rates such as repo rate.  Therefore, the interest rates can change anytime throughout the loan tenure with the change in the linked benchmark rates. In fixed rate personal loans, on the other hand, the interest rate applicable remain constant throughout the loan tenure. 
 
No need for collateral or security
Personal loans are unsecured in nature, implying that applicants do not need to furnish any collateral or security to avail the loans. The absence of any underlying asset, increases credit risk for lenders, thereby, leading them to adopt a more stringent approach for their loan approval process.
 
Zero to minimal document requirements
The unsecured nature of personal loans also eliminates the need for extensive documentation. To process the loan, lenders usually require their applicants to submit the proof of their identity, income and residence. The documents required as a proof of identity and residence are more or less same for everyone. The income documents, however, for salaried applicants usually includes salary slips and bank statements. For self-employed applicants, the documentation process usually involves income tax returns (ITR) of the last 2 years, audited financial statements (balance sheet and profit & loss account) and bank statements or passbook of their current/savings accounts of the last 1 year.
 
Flexible repayment tenure
Personal loan tenure offered by most lenders usually go up to 5 years, with some lenders also offering higher tenures of 6 to 7 years. Banks and NBFCs usually set tenures on your personal loans after assessing your loan repayment capacity. They usually use the EMI/NMI ratio of their applicants to determine their repayment capacity. Lenders prefer sanctioning loans to applicants having their loan EMIs (including the EMI of the proposed loan) within 50-55% of their net monthly income. Those exceeding this limit can choose longer tenures on their proposed loan to reduce their EMIs and improve their chances of availing personal loans.
 
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