A personal loan is an unsecured form of loan where you are not required to back the loan amount with an asset. As a beginner, it is essential to know all the terms that are related to personal loans to make yourself familiar with it. Having an understanding of these terms is necessary before you apply for a loan. The terms are:
- Loan Amount: It refers to the total amount that you borrow from the financial institution. There are several Non-Banking Financial Companies (NBFCs) which offer a higher loan amount than other lenders. For ex. 20 lakhs
- Tenor: The tenor is the amount of time within which you are obligated to repay the loan amount. Tenor differs from lender to lender. These are flexible and are available between periods of 1-5 years. For ex. 5 years
- The Rate of Interest: The rate of interest is the amount that is charged by a lender. It is one of the most crucial charges in any loan. The interest differs from lender to lender. It is important to know that NBFCs offer the most favourable rate of interest. For ex: 8.5%
- EMI: EMI is an equated monthly instalment which you are required to pay on time. There is a certain date before which you are obligated to complete your payment.
- Prepayment & Charges: It is a process of repaying your loan before the tenor gets over. It is important to know about prepayment charges as it is one of the most important charges apart from processing fees and other ones.
Having understood the basic terminologies, it is time to learn about how a personal loan works with regards to the loan amount, tenor and rate of interest. Firstly, let us take all the examples mentioned in the above points. Suppose we are borrowing a personal loan amount of INR 20 lakhs for 5 years at the rate of interest set at 8.5%. Under this circumstance, you will be required to pay an EMI of INR 41,136. However, if you borrow INR 20 lakhs for 3 years, then you will be required to pay an EMI of INR 63,293. Thus, we can understand with this example that the tenor affects the EMI drastically and the tenor also affects the interest amount that you pay over the period.
Having understood the three variables. It is time for us to understand few key aspects:
Rates and Policy Comparison: If you are particular about taking a personal loan, you must make sure that you compare all the rates and policies of the lenders. These policies differ from one another. Apart from that, rates such as interest rates, processing charges, prepayment charges must be studied well before you apply for a personal loan.
Personal Loan Eligibility: It is one of the most attractive online features which has been developed in recent times. A personal loan eligibility helps you to understand your eligibility instantly. Under this point, several aspects are considered such as your age, residence, income and financial details.
Documentation: Once you are clear on the eligibility aspect, you can move towards focusing on your documentation process. It is essential to have your documentation handy to avoid complications. Remember! The documentation is one of the most overlooked processes, but it is one of the most important ones. Various NBFCs have user-friendly websites. You can refer to these websites to understand all the documents that are essential for a personal loan.