What Is A Personal Loan And How Do They Work?

Personal Loan

Personal loans have become immensely popular among the common folks to fund any kind of purchase. Before you take a personal loan, it is important to understand the term fully. Money borrowed from banks, or from an online lender for meeting financial needs like a vacation, marriage, home renovation, and so on is known as a personal loan.

Personal loans are also known as “unsecured loans” and it does not require security and this is the primary reason that personal loan has a higher rate of interest than the home or car loan.

The borrowers pay back the amount as well as the interest in monthly installment over a period of time referred to as its term. When it comes to taking a personal loan, you will find hundreds of easy and fast loan options, and it hardly takes 10minutes to apply online. The complete approval process might take up to a week and this depends on how quickly the lender receives the loan application and processes the documents.

How do personal loans work?

The working of personal loan is just like many other loans. The lender will verify your creditworthiness and will make an offer mentioning the amount which you are eligible for and will let you know about the rate of the interest. If you accept it, then the lender will tranfer the amount to your bank account, and you can start using the money at once.

You have to repay the amount through equal monthly installments. The monthly installment amount depends on the loan amount, rate of interest, and loan tenure. The process might appear easy but when you go to traditional lenders, you need to run around and lots of documentation.

But with online money lenders, taking a personal loan is completely hassle-free and paperless. You can apply personal loan online and get the money instantly to your bank account. You will experience a 100% paperless personal loan and you will get instant e-approval.

There are certain criteria while applying for a personal loan. When you apply for a personal loan, you should be between 25-60 years and must be a full-time employee for at least 2years, and must be a resident of the country.

How to use a personal loan?

The greatest benefit of a personal loan is that one can use the amount in any manner one wishes to. The money can be used in meeting the wedding expenses, for going on a vacation, for home refurbishing, and for meeting the unanticipated medical emergency. Personal loans indeed come in handy no matter what the case might be.

What to Know before applying for a personal loan

A good credit score is a prerequisite for applying for a personal loan. When your credit score is good, most of the money lenders, be it banks or NBFCs would be keen on offering you a personal loan. It can be a daunting task indeed to find out the best option for availing a personal loan.

Before taking a personal loan, here are the 3 things you must know. Let’s take a look at the following three things:

1. Rate of interest

The interest is the extra amount that you pay for taking the loan. So, you must devote adequate time and find the best rate which will subsequently save a lot of money.

2. Repayment period

It is the period that requires you to pay the principal amount as well as the interest. Thus, you must look for the tenure range offered by various lenders and should opt for the one that gives a precise mix of EMI and tenure.

3.Prepayment penalty

When you have the extra money in hand or receive a yearly bonus, the first thing you want to do is to repay the outstanding loan amount. But, the lender might charge a huge penalty for the early closure. Hence, you must check the charges applicable on pre-payment before you apply for a personal loan.

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