What is a Personal Loan? | ZestMoney
When it comes to making purchases and meeting expenses that exceed our budget, one of the very first solutions that comes to mind is availing a personal loan. So, what is a personal loan? In the most simple terms, a personal loan is a kind of unsecured loan borrowed from any financial institution like banks, online lenders, or credit unions to meet a personal need. Personal loan providers lend money to the borrowers instantly and they are expected to repay the amount in instalments with the additional cost of interest. A personal loan can be used for a range of purposes including weddings, education, medical reasons, etc.
There has been a significant increase in personal loans in India, especially during the festive seasons. According to a report published by the Crif High Mark Bureau, the originations in value of personal loans have doubled from Rs. 75,088 in FY 2019 to Rs. 147,236 in FY 2022. Besides that, for the past couple of years, the popularity of personal loans has been increasing as the necessity for personal loans is growing at a fast pace.
Understanding Personal Loans
1. What is a Personal loan: Simply put, a personal loan is a kind of loan that gives you credit instantly. The main factor that differentiates a personal loan is that it does not require security or collateral. Loans like home loans or gold loans require proof of security like assets to avail the loan. But, personal loans on the other hand require no such proof, making them riskier. Because of the risky nature of personal loans, the interest rate on these is comparatively higher.
A personal loan also affects your credit score. Timely instalments of the loan will result in a positive credit score and vice-versa results in a negative credit score. Personal loans can either be secured or unsecured. While unsecured personal loans are definitely more popular, secured personal loans help you boost your credit score.
As the loan amount moves to the higher side, the necessity for collateral to back up the loan increases. More often than not, personal loan uses are limited to purchases that do not fall under the higher amount bracket, cancelling the requirement for security.
2. Benefits of Personal Loan:
A. Instantly available.
Personal loans take little to no time to process i.e., you can get the funds you require with zero waiting time. This also makes personal loans one of the most suitable picks for emergencies.
B. Multiple uses
Personal loans can be used for something as simple as a headset to something like a smart TV, or even weddings and vacations. Personal loans for all these needs can be taken in one similar simple process, with no particular restrictions or requirements.
C. Budget Friendly
Another major advantage of personal loans is that they are easy on your pocket. This is because they offer the convenience of repaying in the form of instalments. So instead of the amount being repaid at once, which can be a hassle, it can be paid part by part.
D. Boosts Credit Score
You can easily boost your credit score by either repaying the amount beforehand or just timely payments of the instalments. By boosting your credit, you can get the best personal loan rates too. If you are struggling with a low credit score, personal loans can easily change that.
3. Understanding Personal Loan Rates:
To understand what is a personal loan, it is requisite that we dive in-depth into the many aspects of personal loans. ‘What is a personal loan interest rate’, ‘how to calculate personal loan interest’, ‘how to calculate EMI for personal loan’, are all important aspects and questions that need to be explored to gain clarity and better understanding.
What is ‘Personal Loan Interest Rate’?
Interest rates are the crucial point for any type of loan, be it home or auto or student. Thus, it is imperative we understand the interest rates while answering ‘what is a personal loan’. The interest that is levied on personal loans, for the tenure of repayment of the principal amount is referred to as the ‘personal loan interest rate’. Personal loans in India vary from the bank or financial institution lending the loan.
Factors that influence personal loan interest rates are:
- Credit Score: It is essential to address creditworthiness and credit score while assessing ‘what is personal loan interest rate’. Generally, credit score and the interest rate on a personal loan share an inversely proportional relationship. That is, if you have a good credit score, then you can get low-interest rates on your personal loan.
- Type of Loan: If it is a secured or co-signed loan, you can get lower interest rates. But, if it is an unsecured loan, because of the high risk involved for the lender, the interest rates would be higher.
- Income: Stability of income is an important factor. Like credit score, income and interest rates vary inversely with each other. . Higher the amount of your income or stability of your income, lower the interest rates on your personal loans. Minimum salary for personal loan also becomes an important factor affecting your interest rates.
How to calculate EMI for personal loan?
The formula to calculate EMI is very simple.
EMI = P x R x (1+r)n / ((1+r)n – 1)
P = principal loan amount, R = Rate of interest divided by 12, n = number of instalments/months.
Let us take an example to understand. If you borrow Rs. 1,00,000 at 12% interest rate for a period of 120 months (10 years), your personal loan EMI based on the above formula will amount to Rs 1,435.
4. Types of Personal Loans
One of the many sub-sections while examining what is a personal loan is personal loan uses. Depending on your requirement or your need you can choose the type of personal loan. Even the personal loan eligibility criteria can differ with the type of loan availed. Some of the many different personal loans available are:
- Travel Loan: For people looking to go on a holiday on a budget, a travel loan is one of the best options. This is because you get to plan your holiday instantly as the funds disbursed are immediate, a huge amount can be taken, and also the repayment period can go up to 60 months or so.
- Education Loan: Usually these loans are taken up by students and co-signed by either their guardians or parents. It is also commonly taken to pay tuition fees, for abroad or higher education purposes, etc. Education personal loans are one of the best types of personal loans for students looking to study further.
- Wedding Loans: Weddings are a massive and costly affair in India. A personal loan is a great choice to finance a wedding loan. Weddings due to their expensive nature usually require a huge amount which can be aided by a personal loan. It can also be paid over a long period of time, making it pocket-friendly.
- Festival Loans: Numerous festivals are celebrated across India with a lot of grandeur and glamour, like Diwali. Festivals are extravagant events which can be taken care of with a personal loan, which can be taken without any complications. The personal loan rates can vary from lender to lender during the festival season too.
- Consumer Durable Loans: Some of the many personal loan uses include financing home appliances and furniture, laptops, smartphones, cosmetics, etc. A few of the many personal loan examples include purchasing home appliances and furniture, laptops and smartphones, clothes and shoes, on EMI etc.
- 4. Exploring Personal Loan Alternatives: The concept of buying on credit or buying now and paying later is slowly becoming a popular concept. With this popularity, there is an increase in the different options available to choose from. Here are a few alternatives of personal loans we have compared to help you make your decision.
Personal Loan VS Gold Loan:
- Collateral: A gold loan is a loan taken by pledging gold as security. So without security, which is gold in this case, a gold loan cannot be taken. Gold in the form of jewellery, coins, etc can be pledged. In case of default of payment, the lending organisation takes ownership of the gold pledged. Therefore, a gold loan is a secured loan. Most personal loans do not require any form of security, one of the reasons why they are favoured widely. In case of default of payment, the defaulter will have to face legal consequences which also affect their credit score negatively.
- Interest Rates: Many say that not only while comparing but even while answering ‘what is a personal loan’, we need to understand interest rates clearly. Interest rates are one of the main factors to consider while comparing gold loan vs personal loan. Because gold loans are secured loans, they come with a lower interest rate compared to personal loans. But, the interest rates, be it gold or personal loans, are based on numerous factors like the duration of the loan, the income of the borrower, the age of the borrower, etc. Personal loans rates are higher because the risk of the lender is higher. This is due to their unsecured nature, making default of payment more common. But, you can get the best personal loan rates with the right lender.
- Processing Time: The processing time for both gold and personal loans is relatively lower. Gold loans take less time to process due to their secured nature. There are no extra steps to check the credit score and history of the borrower. But, with a personal loan, the processing time can be slightly longer. This is because a thorough background check on the borrower’s credit history takes place. But, in recent times, the processing time has been reduced through web portals and apps for personal loans, which disburse the amount within 24-72 hours
- Repayment Period: While comparing gold loan vs personal loan, it is necessary to compare their repayment periods. Gold loans have versatile options for repayment. There are many methods of payment like bullet repayment, which borrowers can choose from. Personal loans are usually paid off through EMIs. That is a monthly payment is done which includes the principal and interest amounts. Personal loan maximum tenure can vary depending on the multiple factors involved. Although there are a variety of personal loan repayment options like different EMI plans, compared to gold loans they are fewer in number.
- Principal Amount: The principal amount for gold loans is based on the amount of gold pledged. According to the current market value of gold, the loan is given based on the weight and purity of the gold. A personal loan can start as low as Rs 5,000 and go up to 25,00,000 or so. For both the loans, the higher the principle amount higher the interest rate. With gold loans there is no limit on how much can be taken as it is directly linked to the gold pledged.
Parameters
Personal Loan
Gold Loan
Collateral
Not required
Required
Interest Rate
10.5%-28%
7.5%-25%
Processing Time
Within 72 hours
With 24 hours
Repayment Period
3-60 months
3-40 months
Amount
Rs. 1,000- 50 lakhs
According to Gold pledged
Personal Loan VS Home Loan:
- Collateral: A home loan is a secured loan that is taken to either construct a new home, purchase a plot, house construction, or even for repairs in a property. The borrower’s property is considered as the security or collateral for home loans. In case of default of payment, the property is seized by the lending organisation. Home loans cannot be taken without the presence of security. Personal loans can be availed easier and faster as they are unsecured in nature. That is, the requirement for any type of collateral or security is eliminated
- Interest Rates: Like gold loans because home loans are secured the rates of interest are generally lower. Personal loan rates also depend on the credit score. If the credit score of the borrower is higher, there is a chance that they get lower interest rates. Interest rates for home loans range from 6.2%-8.5%. But, borrowers can get the best personal loan rates if they build a good credit score.
- Processing Time: A major difference is the processing time while comparing home loan vs personal loan. The process for home loans is slightly more complex than for personal loans. This is because there are many documents and steps in the process involved. The minimum time required for a home loan to be processed is 3-4 weeks, or slightly longer depending on the organisation.
- Repayment Period: The repayment period for home loans varies from 5 to 30 years. It is subject to change with respect to the organisation issuing the loan. Personal loan maximum tenure can also be on the higher side depending on the amount taken and the policies of the organisation. Personal loan repayment period usually lies from a couple of months and can go as long as 5 years.
- Principal Amount: While comparing personal loan vs home loan, the amount is an important factor as home loans can go up to 10 crores or more, whereas personal loans can only go up to 70 lakhs or so (depending on the bank).
Parameters
Personal Loan
Home Loan
Collateral
Not required
Required
Interest Rates
10.5%-28%
6.5%-9%
Processing Time
Within 72 hours
3-4 Weeks
Repayment Period
3-60 months
5-30 years
Amount
Rs.1,000- Rs.25,00,000
5 lakhs – 70 Crores
Personal Loan VS Credit Card Loan:
- Usage: Credit card loans are a type of unsecured loan. Credit cards are used at the point of purchase, which is direct to the vendor, as opposed to personal loans which give the borrower a lump sum at once. A low cibil score loan application is not possible for credit cards as there is a minimum score to be met.
- Credit Score: The main differentiating factor between personal loan vs credit card loan is that credit cards require proof of a strong credit score or history. The documents required for a personal loan are higher compared to credit card loans. Also Check Out: A Comprehensive Guide on What is a Credit Score
- Additional Charges: Additional fees are also an important factor to consider. Credit card loans come with the extra charges of late fees and annual fees. Most personal loan websites, like ZestMoney require no additional fees like application or processing fees.
- Interest Rates: Interest rates are a crucial point of comparison for personal loan vs credit card loan. In the case of default of payment with credit cards, the interest rates can be extremely high.
- Repayment: Personal loan repayment can take place through EMIs which is especially an affordable option. But, with credit cards, the whole amount has to be paid at once at the end of the credit period.
These are the main factors and sub-sections when it comes to ‘What is a Personal Loan’. Understanding these in-depth are the steps to gain clarity on what is a personal loan. Personal loans are one of your best options to purchase on credit, as beyond numerous advantages, they also cater to the many needs and requirements of consumers in the market. They help you with any product or service of your choice in an instant and also help you budget efficiently by repaying in instalments.
By helping people get personal loans in an instant and also with low-cost EMI plans, ZestMoney has contributed to popularising personal loans in India. Additionally, they provide a customer-friendly platform that makes it easy and effortless to take personal loans without having to jump through multiple red-tape hurdles.
Personal loans continue to gain traction as one of the best options for an instant disbursement of funds, and with ZestMoney’s service for a personal loan, one can enjoy numerous advantages. ZestMoney also helps you understand what is a personal loan better by providing answers to questions like ZestMoney answers questions like ‘how to get a loan with low cibil score’, ‘how to get a loan with a low credit score’, ‘how much cibil score required for personal loan’, etc with their services like avail instant loan for low cibil score, low-cost EMI, etc.
Why opt for a Personal Loan with ZestMoney?
- Range of EMI Plans: ZestMoney also offers a wide range of personal loan EMI plans to choose from pertaining to your individual needs.
- No Extra Documents: The only documents required for personal loan that you have to provide to avail of a personal loan through ZestMoney are your KYC Documents. No additional documents are required making it a simple and timely process.
- No Extra Charges: No additional charges are required to take a personal loan from ZestMoney. No extra charges including pre-closure and application fees, making taking personal loans from ZestMoney an affordable option.
How to Apply for a Personal Loan with ZestMoney?
- Personal Loan eligibility: The eligibility criteria to get a personal loan with ZestMoney are as follows:
Must be above 21 years of age and below 65.
Must be an Indian Resident
Must have a bank account ( with any bank )
- Documents required: The only documents that are required for personal loans through ZestMoney are KYC or Know Your Customer Documents which essentially refer to identity and Income Verification.
- Process to be followed:
- Sign-Up: The first step is to sign-up with ZestMoney either through their website portal or by downloading the app. It is a two-step process where you just have to verify your phone number.
- Income Verification: Income verification through net banking or 3 month bank statement upload
- Avail Personal Loan: Once these steps are completed you can get a loan from ZestMoney through a simple and easy process. Also, no additional documents need to be submitted.
Frequently Asked Questions on What is a Personal Loan:
Q1. Can I get a Personal Loan with bad credit?
A. EMI stands for Equal Monthly Installment, this is an option to make payments towards your purchased product in parts over the course of a selected tenure. EMIs are especially useful when buying products that are more expensive than usual, they break down the cost of the product, so that you can make payments without facing extreme financial stress. iPhones on EMI are available over multiple platforms, many banks offer EMI options, there are also digital platforms like ZestMoney that offer EMIs at 0% interest*.
Q2. Can I book a holiday with Personal Loan?
A: Yes, you can book a holiday with a personal loan. ZestMoney offers you the option of booking a holiday with any of their partners through personal loans. Check out our guides to see what other products you can purchase through your personal loan.
Q3. How can I purchase without a credit card?
A: There are many alternatives to purchasing without a credit card. One of the best options is to get a personal loan. ZestMoney, one of the best apps for personal loans, gives you the loan in a jiffy with many attached benefits.
Q4. How can I get a Personal Loan?
A: With a few simple steps including signing up, activating your credit limit and building your credit limit with ZestMoney you can get an instant personal loan with zero hassle.
Q5. Can I avail a personal loan for shopping on retail websites?
A: Yes. You can use personal loans for shopping. ZestMoney offers this option on many retail websites including Croma, Flipkart, Nykaa, and Amazon. ZestMoney has partnered with some of the biggest online brand retailers who sell products and services across the above verticals.
Q6: Do personal loans affect credit score?
A: Yes, personal loans affect your credit score. Personal loans, mainly through repayments can affect your credit score. If you maintain your payments on time, you can boost your credit score. But, there are numerous other factors to be considered including payment history, existing debt, etc. ZestMoney is one of the best low cibil score personal apps, as you can build your credit score by shopping with your partners and timely repayments.
Q7: How to get a loan with low cibil score?
A: ZestMoney helps you get a personal loan even with a low cibil score. They help you activate and build your credit limit which in turn helps you avail a personal loan. Contact us to know more about how much cibil score is required for personal loan.
Q8: Do personal loans count as income?
A: No, personal loans do not count as income as they are considered a form of debt that has to be repaid in the said tenure. As they are not considered an income source, they are also not taxable.
Q9: What is the risk of a personal loan?
A: There are many risks involved with a personal loan including high-interest rates, not being able to repay the monthly instalments on time, default on payment, etc. But, ZestMoney helps you with these concerns and provides you with the best options to avail a personal loan.
Q10: What is the monthly EMI for a 1 lakh personal loan?
A: Loan amount = ₹1,00,000
Tenure = 12 months
IRR = 22%
EMI = ₹9,359
Processing Fees Including GST = ₹4,000
Total Interest Payable: ₹9,359 x 12 months – ₹1,00,000 Principal = ₹12,313
Total amount payable in 12 months = ₹1,16,313
Total cost of loan = Interest Amount + Processing Fees = ₹12,313 + ₹4,000 = ₹16,313
Flat Interest = 12.3% (~1.03% per month)
Maximum Annual Percentage Rate (APR) = ~40%