As the term suggests, a personal loan is a loan which is taken for personal purposes. You do not need to specify the reasons to a bank or financial institute on how you are going to utilize the funds. You can use them at your own discretion for any legitimate purpose. Personal loans can be availed at both fixed and variable rates of interest. The loan can be repaid either in instalments or over an overdraft.
Personal loans can be classified under the two broad categories of secured and unsecured personal loans based upon whether the loan is borrowed against collateral or without any collateral. Most personal loans are unsecured loans.
Secured Personal Loan
In case of a secured personal loan, a bank keeps an asset as security against your personal loan. You can use your car, gold, a fixed deposit or even your insurance policy as collateral. The lender has the option to seize your asset in case you fail to repay your monthly instalments. This reduces the associated risk for lenders and they offer lower rates of interest as compared to those of unsecured personal loans. The processing fee is also lower than what you have to pay in case of an unsecured loan. Moreover, lenders are more willing to give away secured loans.
The following are the main types of secured personal loans:
Gold loans can be defined as funds borrowed from financial institutions on pledging gold ornaments or gold coins. The bank first verifies the quality and quantity of loan before approving the loan application. The bank charges a small fee for processing your loan application.
A gold loan can be taken by any individual who is above the age of 18 years and has a stable income. The loan amount allowed sanctioned varies from bank-to-bank and usually stands between a minimum of Rs. 10,000 to as high as Rs. 20 Lacs depending upon the value of the underlying gold asset. The rate of interest charged for a gold loan is usually 1.25% higher than the MCLR.
Since the value of gold keeps changing, the bank charges appraiser fee from the borrower, according to the appreciated gold value, while releasing the asset.
Loan Against Fixed Deposits
You can keep time deposits like fixed deposits and certificates of deposit as security with banks for availing a personal loan. However, the loan must be taken from the same bank where you have kept your deposits.
The loan amount sanctioned for such loans will be equivalent to 80% – 90% of the value of your deposit and can range between a minimum of Rs. 25,000 to a maximum of Rs. 5 Crores. There is no processing fee charged while approving these loans.
Loan Against LIC Policy
The LIC insurance beneficiaries can use their policies as security for taking a personal loan. These loans can be availed only after the insurance premium for at least three years has been paid. The maximum loan that can be sanctioned against a LIC policy is equivalent to 90% of its surrender value (the amount that a beneficiary will receive on the maturity of policy).
The applicable rate of interest for this type of loan is between 9% – 11% per annum. This interest is to be paid twice a year, after an interval of six months. For availing this loan, the original LIC policy document is to be submitted along with the application form, identification proof, address proof, and income proof.
Loan Against Stocks
You can pledge your equity shares in order to avail a personal loan. The loan amount will depend upon the value of the underlying equity and can be as high as 50% of its value. You even have the option to swap shares based upon the stock market assessment. The loan application takes very less time to process and the funds are usually transferred to your account within 24 hours.
Pension Advance Loan
The individuals receiving pensions from central or state governments can avail a personal loan on signing all or a part of their pension income to the lender. These loans generally have a tenure of 5 to 10 years. However, the APR for these loans are very high and in some cases, these can be even higher than 100%, which makes these loans an expensive deal.
Unsecured Personal Loan
An unsecured loan is the one which has got no collateral backing. It means that you do not need to mortgage any asset for availing this type of loan. Most personal loans are unsecured loans. Since the lender-associated risk is high for these types of loans, they generally have comparatively high rates of interest. The processing fee is also very high for unsecured personal loans. However, the approval process is very easy and quick which makes these loans the best choice for meeting immediate requirements. Both the interest rate and the loan approval are dependent upon your repayment abilities which are judged based upon your net monthly income and your credit history. Currently, the minimum interest rate offered for an unsecured personal loan in India stands at 10.75% and it can go as high as 26%.
The following are the major types of unsecured personal loans available for you:
Co-Sign Personal Loan
As its name indicates, a co-sign personal loan is co-signed by another person. This person is like a guarantor for your loan who ensures the bank that you will repay the loan. His sign acts as an insurance for the loan that in case you are unable to repay your debt, he/she will pay-off the pending debt amount.
A co-signer should have a decent credit score and a good debt repayment history. This option helps those borrowers who have a very thin credit report indicating that they are new to the borrowing business.
Also, if you have a very low credit rating, a co-signer who has an exceptionally well borrowing behavior can fetch for you very low rates of interest.
Debt Consolidation Personal Loan
If you are juggling between multiple EMIs and bill payments, you can go for a debt consolidation loan. This loan combines your multiple debts such as credit card bills, other personal loans, utility bills, and medical expenses. This means that, now, instead of managing multiple EMIs, you just need to pay a single consolidated EMI every month. Debt consolidation can also help you save as the annual percentage rates may be lower than the mean of what you were paying towards your multiple loans.
Personal Line of Credit
A line of credit operates in a manner similar to a credit card. Here, instead of providing you with a lump-sum of money, a bank grants you access to a line of credit. You can borrow money from this line of credit as per your requirements. You are only charged interest over the amount that you borrow and not on the limit sanctioned by the bank. However, interest rates for a personal line of credit are higher than regular personal loans.
A payday loan, usually referred to as the salary loan is a personal loan where you can borrow money from the bank on promising that you will return the amount on your next payday. Any salaried individual who has been working for at least one year and is drawing a salary of more than Rs. 20,000 every month is eligible to avail these loans.
The loan amount for a payday loan can range from a mere sum of Rs. 5,000 to amount as high as Rs. 1 Lac. The interest rates for payday loans are often high and the APR can even reach surpass a whopping 391%.
The financial ecosystem has a plethora of options for personal loans which can help you meet your requirements. While the secured personal loans offer lucrative interest rates and leniency in loan terms and conditions, the unsecured loans come with a stringent repayment procedure and higher interest rates. While you have to mortgage an asset for availing a secured loan, an unsecured loan is given solely on the basis of your repayment capabilities as well as your creditworthiness.