Personal Loan

A Beginner’s Guide to What is a Personal Loan and How it Works


Do you want to apply for a personal loan but are unsure how to go about it? If you have heard about it but have no idea what it is or how it works, this article is for you. In this article, we will explain everything you need to know about personal loans before applying for them. 

So, keep reading to get a perfect beginner’s guide on what a personal loan is and how it works.

What is a personal loan?

One-time borrowing from a financial institution or a bank is known as a personal loan. This kind of loan is repaid through EMIs (Equated Monthly Installments). You obtain a personal loan with interest and EMIs.

A personal loan falls under the category of an unsecured loan, meaning you do not need to give any collateral for it. It simply means that you do need to place any asset under the bank’s control to obtain it. 

How does it work?

Almost all banks and other financial institutions offer personal loans. You get a lump-sum (one-time) amount in your bank account after it gets approved.

You can get your amount disbursed in approximately 7 business days. It can vary according to different banks and your application process. There are also instant loan options available, through which you can get a loan within minutes.

As an example, consider a personal loan. The monthly EMI, for instance, would be Rs. 4,758 for a personal loan of Rs. 2 lakh with a duration of five years and an interest rate of 15%. The consumer would have paid Rs. 29,039 for the premium and Rs. 28,057 for interest after the first year. The consumer would pay Rs. 57,422 less in interest if he chose to prepay the entire amount today.

For what purpose can you get a personal loan?

You can get a personal loan for literally anything. The best part about them is that there is no specific purpose or use tied to them. Banks do not track for what purpose you are using the money. Generally, people get a personal loan for the following purposes.

  • To cover wedding expenses
  • Travel expenses
  • For medical needs
  • Children’s higher education
  • To afford any expensive purchase
  • To renovate their houses
  • For any emergency, etc.

Benefits of getting a personal loan

There are lots of benefits to getting a personal loan. For example,

  • Personal loans do not require any collateral.
  • You do not require a lot of documents. That means the documentation process is less complex compared to other loan options.
  • The disbursal of the amount is also very quick compared to other loan options.
  • The interest rate remains fixed over the whole term of the personal loan.
  • The time period for which you can avail yourself of a personal loan is very flexible. You can select a time period according to your payment capacity.
  • You can use the amount for any purpose according to your needs. There is no specific purpose when it comes to personal loans.

Documents needed for a personal loan

The list of common documents that will be required at the time of applying for the personal loan is as follows.

  • Address proof
  • Identity proof
  • Age Proof
  • Salary slips or any other income proof
  • Bank statement or passbook
  • Income tax return

How do I choose a personal loan?

While choosing a personal loan, you should keep the following points in mind. You should give priority to the points according to your requirements.

  • Interest rate: The interest rate is the most important aspect that you should consider while choosing a personal loan. Personal loans are the easiest and quickest to get, but their interest rates are also among the highest. If your other requirements are fulfilled, then you should go for the lowest interest rate.
  • Disbursal of amount: If there is an emergency, you can choose the personal loan, which disburses in a few hours.
  • Fees and charges: Always double-check all fees and charges associated with personal loans.
  • Tenure: Choose the personal loan according to the tenure that suits your repaying capacity. Generally, it ranges between 1 and 5 years. EMIs are completely dependent on the tenure of the loan. The shorter the tenure, the bigger the EMI, and vice versa.
  • Credit scores: Choose the personal loan according to your credit scores. If your credit scores are not good, choose the one that gives little importance to them.
  • Documentation: If possible, try to look for less complex documentation and application processes for personal loans.

How do I apply for a personal loan?

You can apply for a personal loan by following the steps given below.

  • Firstly, check your credit score. You can do that online by using any credit score checker. Some of them are available for free.
  • The next step is to check your eligibility to get a personal loan. For that, too, different calculators are available online.
  • Now, research and compare different financial institutions’ interest rates, terms and conditions, tenure, time taken to disburse the amount, etc.
  • Choose the lender according to your requirements.
  • Get your required documents ready.
  • Fill out the application for the loan as accurately as possible, as misinformation or any mistake can lead to loan rejection.
  • Then, submit the application with the documents.
  • Keep patience while your financial institution processes your application and disburses the amount.
  • Finally, after getting the loan amount, you are free to use it any way you want.


Personal loans have become a go-to solution for any financial issue. This is mainly because of the emergence of many fintech companies that provide easy and quick personal loans. As easy as it sounds to get them, you also need to keep in mind not to take on too many loans at once. Because if you fail to repay them, it will negatively affect your credit scores, which creates problems in the future when you try to get other loans and credit cards.

We hope that you are now clear about how personal loans work and how to apply for them. If you want to talk to someone about them or anything else related to money, you could contact Piramal Finance.