Are Guaranteed Loans Too Good to Be True?

A definitive Guide to Personal Loans for Beginners

Finance Loan Personal Loan

Last Updated on 16/06/2021 by Pardeep Garg

These days crucial financial commitments occur without any precedence. The pandemic has also posed a lot of financial difficulties for many. You can always opt for a personal loan in order to meet the short term financial commitments. However, if you have never opted for one before, here is all that you need to know about personal loans so that you can go ahead and apply for the same without any hassle. 

What is a personal loan?

A personal loan is an unsecured loan. It is sanctioned on the basis of your credit score and your personal income. It does not require any collateral which means, you need not sign away any of your assets to get the loan. However, because of the lack of collateral, personal loans tend to have a higher rate of interest, as compared to other loans.

A personal loan is a helpful financial aid for tackling urgent financial matters or taking care of any personal expenses.

Reasons to get a personal loan:

Since personal loan are applicable to any expense, you can apply for one at any time for any valid reason for your choosing. The 10 most popular reasons for applying for a personal loan are:

1.  Home Renovation:

Renovating your house and other paraphernalia expenses associated with the same.

2.  Wedding expenses:

To pay for wedding expenses, honeymoon and other associated expenses.

3.  Medical emergencies:

This is one of the most important reasons for financial stress amongst Indians. More than 100 million Indians move into poverty every year for health care expenses. This can be saved by opting for personal loans to meet immediate expenditure

4. Paying off multiple debts:

Using personal loans to consolidate your multiple debts and paying off higher interest loans is one of the most efficient usages of personal loans. For example revolving of credit card balance could result in an annual rate of interest of 42% compounded monthly.

This is significantly higher than the rate of interest you need to pay for personal loans. Hence, using personal loans to pay off high-interest loans or multiple loans in order to consolidate your debt portfolio, is an efficient financial planning tool.

5. Working capital for your business:

Usually, people opt for overdraft or business loans for working capital requirements of your business. However, if you have a short term requirement with minimal paperwork, then you can surely opt for a personal loan to meet your urgent financial requirement.

6. Children Education expenses:

Child education inflation in India is more than 10% annually and if you need admission fees or cash for other educational expenses, a personal loan can be availed.

7.  Vacations:

Vacations are important for rejuvenating yourself and working upto your optimal performance. However, if money is a concern for taking a break and going on a holiday, personal loans can be the answer to your needs.

8.  Car:

In order to buy a new or a pre-used car or repair the same, you can opt for a personal loan for the same.

9.  Consumer durables:

Personal Loans provide easy access to any expensive gadgets, furniture, etc. with zero or minimal paperwork.

10.  Emergency expenses:

Emergency expenses are of course the unplanned ones. This is again where personal loans play a huge role in paying for any unprecedented expenses.

You can use a personal loan for any sort of expenses and it is not limited to the ones mentioned above.

Eligibility criteria to apply for a personal loan:

Since there is no collateral involved, the eligibility factors for a personal loan involve the following:

1. The nature of your employment

The terms of eligibility vary based on professionals, salaried employees, self-employed professionals, etc.

2. Your aggregate monthly income

Several banks opt for a minimum monthly salary of INR 25,000. Other lenders may have a varied minimum monthly salary limit.

3. Your age

A salaried employee between the ages of 18 – 60 is eligible.

– Women, self-employed businessmen, and other professionals between the ages of 25 – 65 are eligible.

4. Your term of employment

It is necessary to have a consistent work history and experience.

  • Salaried employees must have at least 1-year long experience under their current employer.
  • Self-employed professionals must have at least 3 years of experience.

5.  Your credit score

This is determined by your history of borrowing money from lending institutions. The other factors for determining your credit score are your credit utilization, enquiries as well as your credit mix of secured and unsecured loans.

The higher your credit score, the better the terms of your loan would be. You can get a personalized credit score from notable companies such as CIBIL. 

Calculating the EMI for your personal loan

You can calculate the EMI online on multiple websites before you apply for a personal loan. You can also calculate it manually using the following formula:

EMI = Px[{Rx(1+R)^n}]/[(1+R)^n-1]


P” is your principal loan amount “R” is the rate of interest and “n” is the number of monthly instalments.

Documents required for a Personal loan

Even though there is no requirement for collateral, a personal loan application requires other forms of documents to be submitted such as:

1.   Updated bank statements Or Employee Salary Slips

2.  Proof of age – You can submit one or more of the following:

3. Statement of aggregate income

4. Up-to-date reports of Income Tax Return

5. Form 16 or salary slips as issued by employers.

6. A valid report of credit score

7. Address Proof – You can submit one or more of the following:

  • Electricity bill
  • Phone bill
  • Ration Card
  • Aadhaar Card
  • Passport
  • Voter ID

8. Photo ID proof – You can use one or more of the following:

  • Aadhaar card
  • Passport
  • Driving license
  • PAN card
  • Voter ID

9. Recent passport-sized photographs.

Things to remember before getting a personal loan:

Although personal loans are a viable source of handling your immediate financial needs, there are a few things you must bear in mind before you apply for it:

  • Due to the omission of collaterals, the interest rates on personal loans are considerably higher. They can range from 10% to 18%
  • You must have a consistent work history. If you shuffle professions constantly, then you may not be eligible for a personal loan.
  • You must meet the minimum income requirement in order to avail a personal loan.
  • You must have a good credit score. That means, if you have defected from paying your loans in the past, then it is going to influence your eligibility for a personal loan.
  • Check if your lender facilitates repaying the loan sooner. This will help you avoid large amounts of money paid towards interest if the tenure of your loan is long.
  • Consider your financial commitments and factor in the added EMI that you will have to pay every month.

In conclusion, a personal loan is a viable means to meet your financial requirements at any given time. Since there is no need for collateral, the process of approval is much faster and quite effortless. As long as you meet the eligibility criteria and find a suitable lender, you can avail of the loan and take care of your financial commitments.