Personal Loan Glossary: Key Terms to Know

A personal loan is an unsecured loan offered by banks, NBFCs, or other digital lenders to help you meet various financial needs. There is no need for any collateral or security. You receive a lump sum amount that can be used for any purpose with no end-use restrictions. This type of loan is usually quick to apply for and allows you to access funds fast, as no collateral needs to be verified or evaluated. With a good credit score and by meeting the lender’s eligibility criteria, you can get this loan instantly.

You repay a personal loan over a fixed tenure through equated monthly instalments (EMIs) that include both the principal and interest components. However, lenders may also offer other repayment structures to suit your finances.

Taking out a personal loan can be an empowering financial decision, allowing you to meet goals or cover urgent expenses. However, it’s easy to feel lost when confronted with complex terms and jargon during the loan application process. Understanding these terms not only helps you make informed decisions but also ensures you know exactly what you’re signing up for. Here’s a glossary of essential personal loan-related terms to guide you through the process.

• It is an initial payment you make upfront when purchasing an expensive item on a loan.

• If you’re taking a loan for a car, you may need to pay 20-25% of the total cost as a downpayment.

• A higher downpayment can reduce your monthly EMIs and overall interest costs.

• It is the fixed monthly payment you make towards repaying your loan, consisting of both principal and interest components.

• In the early years, more of your EMI goes towards interest; later, it focuses more on the principal.

• Use an EMI calculator to understand your monthly obligations and plan your budget accordingly.

• It is an interest rate that remains constant throughout the loan term.

• Provides stability as your EMI won’t fluctuate due to market changes.

• Fixed rates may be slightly higher than floating rates, but they offer predictable payments.

• It is an interest rate that fluctuates with market conditions, influenced by changes in lending rates and economic factors.

• Often, it starts lower than fixed rates, potentially saving money if rates decrease.

• Your EMIs may increase over time, making it essential to budget for potential rate changes.

• It is a one-time fee charged by the lender for processing your loan application.

• Typically, it ranges from 0.5% to 1% of the loan amount.

• Always factor this cost into your loan amount to avoid unexpected expenses.

• It is a loan backed by collateral, such as property or other assets.

• Some examples are home loans, auto loans, and gold loans.

• If you default on a secured loan, the lender can seize the asset to recover losses.

• A loan guarantor is a person who promises to repay the loan if the borrower defaults.

• Lenders may require a guarantor for high loan amounts or when the borrower has low income or creditworthiness.

• Usually, family members or close friends serve as guarantors.

• It is a loan that does not require any collateral, granted based solely on the borrower’s creditworthiness.

• Some examples are personal loans, student loans, and credit card loans.

• Unsecured loans generally have higher interest rates due to the lack of collateral.

• It is an unsecured loan you can use for various personal expenses, from weddings to medical emergencies.

• No restrictions on how the loan amount is spent, making it ideal for diverse financial needs.

• Lenders assess your credit score and income before approval.

• It is the maximum amount a lender is willing to provide based on your income and credit profile.

• Some factors affecting the limit are income, credit score, and debt-to-income (DTI) ratio.

• Avoid borrowing up to your limit; keep room for emergencies and avoid unnecessary debt.

• It is the percentage of your monthly income that goes towards loan repayments.

• Lenders usually prefer a DTI below 50%, as a lower ratio indicates better financial stability.

• A high DTI can reduce your loan approval chances or lead to higher interest rates.

• It is the time frame within which you must repay your loan.

• Longer terms mean lower monthly EMIs but higher interest costs over time, while shorter terms have higher EMIs but lower total interest.

• It allows you to repay your loan in part or full before the scheduled term.

• Can save on interest costs if done early, but some lenders may charge a fee for prepayment.

• Check for prepayment options when applying, especially if you plan to clear the debt sooner.

• It is a fee charged when you decide to cancel the loan after it’s been approved.

• Typically includes a fixed fee plus applicable GST.

• Ensure you’re committed to the loan before approval to avoid cancellation fees.

• It is a fee charged for processing your loan application, usually around 1-2% of the loan amount.

• This fee is non-refundable, so always factor it into the total cost of borrowing.

Understanding loan terminology is crucial for making sound financial decisions. By familiarising yourself with these terms, you’ll be able to compare options, choose suitable loans, and confidently navigate the application process. Remember, knowledge is power, especially when it comes to managing your finances effectively. Taking the time to understand these terms will ensure you select the best loan and avoid unnecessary costs or surprises down the line.

A personal loan is a versatile financial product that you can use for any legal purpose. Common uses include medical bills, home renovations or improvements, and covering unexpected expenses like car repairs or appliance replacements. 

Personal loans can also fund large purchases such as furniture, electronics, or travel expenses. They are often used for weddings, higher education, and debt consolidation by combining high-interest debts into a single loan with a lower rate. 

The minimum personal loan amount you need to borrow varies depending on the criteria set by different lenders. In India, many lenders offer personal loans starting from ₹5,000. The exact amount you can get depends on the lender's policies, your income, credit score, and eligibility.   

The tenure of a personal loan in India typically ranges from a minimum of 3 months to a maximum of 60 or 72 months. Choosing the right loan tenure is important as a shorter tenure allows you to repay sooner via higher monthly payments. However, you pay less total interest over time. Conversely, a longer tenure results in lower monthly EMIs but higher total interest cost. 

Several key documents are generally required to verify your identity, address, income, and financial stability when you apply for a personal loan in India. These documents usually include your Aadhaar card, passport, utility bills, voter ID, Form 16, IT returns, and bank statements. Lenders normally require KYC documents as well as income and employment proofs. 

The key step is to ensure that you meet the eligibility criteria of the lender. Once you qualify for the loan, you can fill up the application form, provide the correct documents, and complete the KYC process. 

To get the lowest interest rates on a personal loan in India, maintain a high credit score, have a stable income, choose a shorter tenure, compare multiple lenders, and negotiate for the best offer. Being an existing customer of the lender or opting for a pre-approved offer also works in your favour. 

When applying for a personal loan, there are several extra charges you may need to pay in addition to the principal and interest. The most common extra charges include:

• Processing Fee: This non-refundable fee covers the cost of processing your loan application and document verification

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