"Personal loans" are treated as unsecured loans because these loans are granted based on the borrower's creditworthiness and ability to repay, rather than being secured by collateral. Unlike secured loans, such as home loans or car loans, where the lender holds an asset as security in case the borrower fails to repay the loan, personal loans do not require any collateral.
The term "personal" in personal loans signifies that the loan can be used for various personal purposes, such as medical expenses, travel, education, debt consolidation, or any other personal financial need. The flexibility in the use of funds distinguishes personal loans from loans that are earmarked for specific purposes, like a home or a car.
These loans are typically granted based on the borrower's credit history, income, and employment stability. Interest rates on personal loans are often higher compared to secured loans because of the higher risk for the lender, as there is no collateral to recover in case of default. The borrower's personal creditworthiness becomes a crucial factor in determining the loan approval and interest rates.
Depending on your credit score (published by a credit bureau like CIBIL), your interest rate could vary from 10% to 24% per annum
Annual Percentage Rate (APR) offered to customers in 2023-24 has ranged from 10.35% to 24.59%
Processing fees could vary from 2% to 3%. Foreclosure charges (also called prepayment fees) are applicable if you back earlier and range from 3% to 4% of the outstanding amount
Loan must be taken for at least 12 months
Loan must be repaid within at most 60 months
From ₹50,000 to ₹7,00,000
Failure to repay one or more EMIs on time can affect your credit score and hurt your ability to borrow in the future. Failure to repay dues for more than 60 days could result in legal recovery proceedings against you.
While the bank tries to independently establish whether you will be able and willing to repay, the prime responsibility remains that of the borrower - i.e. yourself. Only borrow as much as you will be able to repay taking into account the applicable interest. Do not borrow any more than what you believe your future income can support.
Let's say someone borrows an amount of ₹50,000
Loan Processing Fees @4% i.e. ₹2,000 would be deducted from the loan amount disbursed
Thus net amount disbursed: ₹48,000
Repayment period: 5 years
Interest rate: 21% per annum
Equated Monthly Installments (EMI) to be repaid for 60 months = ₹1,353 per month
Total Amount to be Paid Back = ₹2,000 + 60 * ₹1,353 = ₹83,180
Thus Total Cost of borrowing (fees + interest) on a ₹50,000 loan at 21% interest over 5 years would work out to ₹33,180