Banks offer a variety of loans to their customers. Personal loans are the most common and popular types of loans offered by both private and public banks. In such a type of loan, borrowers get a lump sum from the banks. The borrowers must repay it in installments with interest and the principal amount.
Minimum security and collateral
Unlike other loans, personal loans can be granted to individuals with minimum documentation. The process is straightforward and efficient. They also do not require any collateral or security. There are secured and unsecured loans.
Who all offer such loans
Union banks, credit financial institutions, public and private banks, or even online lenders offer the service of granting a personal loan. Most institutions charge interest on such loans, while very few charge fees.
People take these loans to cover several personal expenses. The amount of interest, repayment terms and time duration varies from bank to bank. Such loans are mainly used to cover the costs such as:
- Debt consolidation
- Hospital bills
- Vacation expenses
- Wedding expenses
- Unexpected or unforeseen losses
How are they different from other types of loans?
Student loans, agricultural loans, housing loans, etc., cover funds for specific purposes. Personal loans are taken for generic purposes and can be used to cover more than one funding area.
How is it different from credit cards and bank overdrafts?
Credit cards and bank overdrafts are services banks provide to use the money whenever a person wants for whatever purpose. It does not have a fixed deadline or restriction on the amount and time of spending. Credit cards can be used as long as the person using them pays the bill at the end of each term.
With loans, there is a fixed deadline at the end of which the loan has to be paid along with the interest amount. In this case, the person is liable to pay the amount to the bank. Loans are taken when vast amounts of money are involved.
Types of loans
- Secured loan- A secured loan is when the bank takes the person’s assets as collateral or security in case the individual cannot repay. It is a form of guarantee from which the bank will recover the amount granted. An individual can secure a loan using cash assets, certificate of deposits, car, house, etc.
- Unsecured loans- These are the loans when banks and other lending institutions do not take any collateral or security against the debt offered. This is usually done when a small amount is granted, or the customer’s credit score is very high. As a result, the rate of interest charged is higher than secured loans.
How to get a loan?
- One has to first fill the form with a bank or other lending institutions. The bank requires basic details such as name, addresses, occupation, etc., for background checks.
- After reviewing the details, the lender approves or disapproves of it.
- Once the loan has been approved, the amount will be funded in a new account under the customer’s name. This means that the amount can be directly transferred to the borrower’s account, or a cheque can be given.
- Once the repayment process starts, the borrower must pay in installments and interest to clear off the debt.
For example, if a person has taken a loan of $1000, that has to be repaid in 12 months at the interest rate of 10% pa. The person has to pay the principal amount of $1000 and the interest amount of $100 in equal or unequal installments over 12 months. An extra charge will be levied in case of delayed payment.