A personal loan is an unsecured loan which is taken by an individual from a bank or non-banking organization. This loan is taken to meet someone’s various types of expenses. Like he can build up a business, invests the money or pays for some other personal expenses. This loan is provided on the basis of someone’s income level, his payback capacity, credit or employment history.
A personal loan is not a secured loan like a home or car loan. To avail this loan, the borrower does not have to put anything as security like property or gold. So, in case of a default, the lender can not auction anything the borrower owns. As the risk factor is higher on this type of loan, the rate of interest is also higher than any other loan like a home or gold loan.
However, like other loans, defaulting on a personal loan is not good as it would reflecting on a borrower’s credit report. It may cause a problem when the borrower applies for any credit card or some other loan in the future.
Benefits of taking a personal loan
- A personal loan can build or support someone’s credit score.
- Usually, the interest of a personal loan is lower than other loans. One can pay his planned expenses with this personal loan.
- A person does not need to mortgage their assets to take a personal loan. He can borrow money from any banking and non-banking organization in a risk-free way.
Here various types of interest rate structure offered for a personal loan are described below:
Fixed interest rate
A fixed interest rate is one of the most common forms of interest for the borrower and the lender as well. It is a specific interest that is tied to a loan that must be repaid along with the principal amount. This rate of interest is easy to calculate, easy to understand. Both the lender and borrower knows the exact amount of interest.
Variable interest rate:
This type of interest fluctuates with the change in interest rates. It is based on an underlying benchmark interest rate. The increment of interest payment is based on rises of the underlying index. This is also known as a floating interest rate.
Simple interest rate:
Simple interest is an easy and quick method of calculating the interest on a loan. It is calculated on the principal amount of a loan. This is charged on an annual, quarterly, monthly or daily basis and does not add any interest rate on the gathered interest amount on the principal amount.
Compound interest rate:
Compound interest is a type of interest which is calculated on the initial principal. This also includes the total accumulated interest of previous loan amount. This is frequent and one who takes a personal loan with compound interest has to pay interest over interest.
Prime interest rate:
Prime interest is a rate of interest that the commercial bank provides to their most creditworthy customers. The prime interest rates are variable and the rates of personal loans are quite often based on this variant of interest rates.
Basically taking a personal loan is much easy. A person does not have to face many problems as it is a hassle-free process. The paperwork and the documentation process for taking a personal loan are easier than other loan taking process. As it is an unsecured loan, one does not have to mortgage collateral such as the home or shares or other assets to get the loan. Only a few documents are needed like ID proof, address proof and income proof. Moreover, if the loan is pre-approved, then the person may not need to provide any of the documents. Overall, a personal loan is always convenient because a person can repay the loan amount over a period of time and the amount of installment is pocket-friendly.