Personal loan

Personal Loans Overview

A Personal Loan is a type of Loan, which is provided by a Bank or a Non-Banking Financial Company (NBFC), to a person, without receiving any security from the Borrower. The Lender evaluates the Borrower on multiple criteria, such as: Income, Credit History, Employment History, i.e., factors relevant to the financial transaction. This kind of a loan is sometimes called as a Signature Loan. The Borrower is either a Salaried or a Self-Employed Individual. The Loan Applicant needs to submit documentation to a Loan Sanctioning Officer, and the Officer makes a decision about the grant of the Loan, based on the evaluation of the submitted documentation and the Credit History of the Applicant.

A Personal Loan is a kind of an Unsecured Loan i.e., the Borrower does not provide any Collateral to the Lender, for the Loan amount. Hence the Lender is contrained in the event of a Default (when the Borrower does not repay the Loan amount) in that the Lender cannot auction any Collateral for collecting the Loan amount back. Hence the Risk associated with the Personal Loan, for the Lender, is considered to be higher, as compared to a Secured Loan such as a Home Loan, a Car Loan, a Gold Loan etc.

The reason why a Borrower is still expected to be responsible for the repayment of a Personal Loan, is that Default results in unhealthy Credit History for the Borrower and so the next time the Borrower seeks any other Loan from any Lender, or even a Credit Card from an Issuing Institution, the Borrower is evaluated on the basis of the Credit History, which would indicate the Default, and hence the chances of being issued a Loan or a Credit Card, get reduced, and even if issued, would be at higher Interest Rates, thereby making the transaction costlier for the Borrower.