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Common Personal Loan Terms That You Must Know


Credit comes in many forms, including credit cards, mortgages, automobile loans, commercial loans and personal loans. Each type of these credits has a certain purpose attached to it, whether it is to buy a car, a house, monthly expenditure or any kind of financial or medical emergency that comes into our lives.

A personal loan that way, can also have multiple purposes. One can avail personal loan to apply for higher education, home renovations, medical purposes, basically, for all the personal reasons one can think of. Personal loan can be categorised into secured and unsecured loans. Unsecured loans are those which are not backed by any collateral. The lender decides whether you qualify for an unsecured personal loan on the basis of your financial history. If you don’t qualify for an unsecured loan, or want it at a lower interest rate, some lenders will offer some secured loan options as well.

On the other hand, secured loans are backed by some collateral. Just in case, you are unable to pay your loan amount, the lender has a right to claim your asset as payment of the loan.

Here is a list of some common terms that one should know before going ahead with the idea of applying for a loan.

  • Interest: When you apply for a personal loan, you agree to repay your debt with interest, which is essentially the lender’s charge for allowing you to use their money and to repay it over time. You will pay a monthly interest charge in addition to the portion of your payment that goes toward reducing the principal.
  • Eligibility: Most financial institutions and banks have eligibility criteria for any type of loan that you might be looking for. These parameters are set by them in order to get assurance from you whether you have the ability to pay back the loan amount or not. Some factors that they will consider include employment, credit history, loan security and income. To avail a personal loan, you must have a regular source of income, whether you are salaried or self-employed business person or a professional. Only once the financial lender agrees to all the eligibility parameters, you can avail a loan according to your requirements.
  • Processing Fee: Typically, banks charge up to 1-2% of the loan amount as processing fee. A few banks charge a flat processing fee. These charges add to the total cost of the loan. Lower the processing fee, the better.
  • Prepayment Fee: Sometimes, you take a personal loan to tide over the short term cash crunch. In such a case, prepayment loan is a possibility when the cash flow improves.
  • Late payment fees: Credit institutions levy penalty in case you are late on EMI payment. If you are struggling with cash flows, do consider this penalty as well.
  • Extra charges payable: In addition to the interest payable on the principal amount, there is a non-refundable charge on applying for a personal loan. The lender charges a processing fee, usually 1-2% of the loan principal, to take care of any paperwork that needs to be processed as part of the application process.
  • Pre-closure: It refers to completely paying off a personal loan before the loan tenure has ended. Just like prepayment charge, pre-closure charges range from 2-5% of the loan amount.
  • Loan Approval Process: The approval is at the sole discretion of the loan sanctioning officer whose decision is based on the criteria specified by the bank/financial institution. The entire process can take between 48 hours to two weeks. Once all the necessary documents are submitted and the verification is completed, the loan, if sanctioned, is disbursed within seven working days by the bank.
  • Debt Consolidation: If you have many debts and loans to pay off, you may often get confused and miss due dates or be unable to plan your repayment requirements correctly. So, taking a personal loan and consolidating all your debts under one account may prove to be good for you. This arrangement will help you focus on making just one payment and one due date every month so that you can keep a closer eye on the rate of interest, amount to be paid off and so on.
  • Credit Score: Credit Score plays an important role when it comes to availing financial services. This is the very first thing any financial lender would check once you apply for any loan that you need. Credit score is a number which determines your credit rating which has been formed over the years. The chances of loan approval are higher if your credit score is generally above 700.

These terms will guide you if you are thinking of applying for a personal loan. But before going for personal loan, it is important that you analyze your financial situation carefully and not pile up additional debts.

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