A personal loan is an unsecured loan wherein no commodity is mortgaged to the bank as security. These loans are granted for a variety of purposes such as holidays, education, wedding, medical emergency, etc.
The interest rates for personal loans are comparatively higher in comparison to any other loans. The interest rate for a personal loan is 3 to 10 percent higher than other loans such as home loans. The banks and financial institutions grant loans based on credit history only of the individual since there is no security or commodity mortgaged against the said loan. Therefore, the creditworthiness of the loan applicant is the primary factor basis in which the Banks approve the loans of the applicant. The CIBIL score of the applicant is determined from various factors including but not limited to the past payment history and overall track record of defaults in payments. Depending upon the nomenclature of the respective Bank, personal loans are approved instantly.
The Banks charge a comparatively higher amount of interest for disbursing personal loans since the risk factor is high as no commodity is mortgaged against such loans which make the recovery of loan difficult in case of any defaults or bad debts. Personal loans are granted for a minimum amount of Rs. 50000/- to the maximum of Rs. 25 Lakhs with repayment duration of 1 to 5 years.
Since the risk factor involved in unsecured loans are higher, any default in payment by the user carries high weightage and results in a high negative impact on the CIBIL score. The CIBIL score is calculated on a scale of 900 points and the user should try to maintain the minimum a CIBIL score of a minimum of 750 points. Preferably, the loan applicant should also try to maintain a loan mix of secured loans as well with personal loans to keep the CIBIL score in control and should avoid any defaults in payments.