Personal Loan

1. A Loan easily available but hard to repay: PersonalLoan
Sushmita Audichya
MBA (Finance)
3rd
Semester
Introduction
A personal loan is a loan taken by an individual to find any personal expense like, for example, a
wedding, to make renovations to the home or even for a vacation. It is a type of unsecured loan and
helps to meet your current financial needs. Personal loan gives the flexibility to use the funds as per
your convenience and need.
Personal loan is a solution for your instant cash and can be used for travelling, wedding, medical
emergency, home renovation or anything else.
Unlike many other kinds of loan, there is no restriction on how the borrowed fund is finally used. The
borrower has full freedom to use the money for any purpose they want.
Features of Personal Loan
 There are no restrictions on how you should spend the loan amount. This in contrast to a home
loan or auto loan where the loan amount can only be used to buy a property or a vehicle
respectively. A personal loan allows you the freedom to use money in any way you want.
 A personal loan is an unsecured loan, meaning you are not required to provide any security to
the lender in the form of cash, shares or any other assets. This might make it more attractive to
some customers who may not be able to raise the cash required as collateral.
Loan Amount and Tenure
There is no typical amount and loans can range from a few thousands to lakhs. The personal loan is
easily available but interest rates charged on this are very high which leads difficulty in repaying back
this loan. Interest rate ranges from 14% to 24%.
Personal loans are generally short term loans and the tenure can range from 1 to 5 years. Personal
loans are sanctioned within 1 hour.

2. Factors that influence approval for a personal loan
a. It is generally advisable to have a credit score of 750 or above to qualify for a personal loan.
The higher your score, the better are your chances of being approved.
b. Employment is yet another important factor in loan approval process. Since personal loan
customers do not provide any collateral, lenders need to make sure that you will have a
steady job over a loan period.
c. EMI payment records. Lenders will look at your credit report to check if you have consistently
demonstrated financial discipline and a pattern of timely EMI payments.
d. Income is another factor. The higher the person income higher will be the chances of being
approved for a personal loan.
Types of Personal Loan
1. Secured Loan: A secured loan requires to put up an asset as security in order to borrow
money from the lender. As security for the bank you can offer your car, house or even jewellery
as collateral. This means the lender can take possession of your asset if you fail to make the
required repayments.
Pros
 Lower interest rates and fees because the lender has less risk.
 Secured bank loans are easier to obtain from reputable lenders.
Cons
 If you default on the secured loan you could find yourself without a car or roof over
head…the lender will sell any particular asset to recover any money.
2. Unsecured loan: An unsecured loan does not require you to put up an asset to the lender for
security. So if you don’t have an asset like a car or a house you will be looking at taking out an
unsecured loan. You may have to convince the lender you can make repayments on the loan
by way of providing evidence of your income through pay slips.
Pros

3.  Good option if you don’t have any assets.
 Unsecured loans typically have lower interest rates than credit cards and many “buy
now, pay later financing needs.
Cons
 High fee penalties for late payments.
 The lender may take possible legal actions if you default on the loan.
 Most providers charge higher fees and interest rates compared to a secured loan.
3. Student Loan: Fortunately many lending institutions recognize the financial burden university
students are under by offering assistance in the form of a student loan. This loan can help
purchase a laptop, textbooks and other such educational expenses.
Pros
 A student loan can be deferred for up to 5 years.
 Some banks don’t have an upfront fee on a student loan.
Cons
 Interest applies from the date you take out a loan, so it piles up pretty high.
4. Overdraft/Line of Credit: An overdraft/line of credit personal loan is great to have in case of
an unexpected emergency. It allows you to overdraw your account to an agreed amount
established by the bank. You only pay interest on the money you use not on the maximum you
are able to borrow.
Pros
 Access to extra money when times are tough 24/7.
 Interest is only charged on what you use.
Cons
 Interest rate is usually higher than other types of personal loan.
5. Debt Consolidation: A debt consolidation loan can help you to get out of debt sooner. By
combining all your debts into one personal loan you can save on interest repayments.
Pros
 Helps you pay off all your debt faster with a competitive rate.

4.  One regular payment as opposed to several throughout the month.
Cons
 Chance to fall into more debt, easy to slip back into bad spending habits.
Advantages of Personal Loan
 The biggest advantage of personal loan is that it can be used for variety of purpose, unlike
housing loans which can be used for only construction or purchase of house or vehicle loan
which can be used only for purchasing vehicle. For example if an individual needs $5000 for
marriage, $2000 for renovation of house and $1000 for other important expenditure then a
personal loan of $8000 will solve all his or her problems.
 Another advantage of personal loan is that the whole process right from applying for loan to
the documentation of loan and then disbursement of loan takes far less time compared to other
loans. Hence when one is in urgent need of funds then a personal loan is a best option.
 All types of loans requires collateral security but personal loans are exception and hence
people who do not have any fixed assets with them and are unable to get any loan then
personal loan comes to rescue for such people.
Disadvantages of Personal Loan
 The biggest drawback of this type of loans is that they carry very high interest rate, since
personal loan is unsecured in nature therefore lenders or banks charge higher rate of interest
on these loans as compared to housing or vehicle loans.
 It is not easy to get this type of loan it is not like you will walk in the bank and bank will give you
money, in order to get personal loan an individual needs to have good credit rating and good
credit history hence this requirement regarding credit rating and history makes majority of
individuals ineligible for personal loan.
 Another disadvantage of personal loan is that many banks and financial institutions do not
allow part repayment of the loan which in turn results in debt getting bigger and bigger due to
interest rate.

5. Conclusion
Personal loans are ideal when there is short term cash requirement but borrower does not have any
collateral and borrower requires funds immediately. However before taking personal loan an
individual should keep in mind that personal loan carry very high interest rates which can lead to
problems if the loan is not repaid in time.