What Is a Personal Loan & How Does It Work?

20^th Jan 2023...

At present, people are increasingly opting for personal loans to meet their financial needs. Whether it is for weddings, travel, higher education, or unexpected expenses, personal loans provide a convenient way to access funds. Over the last decade, the personal loan industry in India has experienced significant growth. Understanding the various types and workings of personal loans enables borrowers to make informed decisions about their borrowing.

Let's walk you through the meaning, definition, types, uses, and working of personal loans in detail.

What Is a Personal Loan?

As the name suggests, a personal loan is a type of loan that an individual can take without providing any collateral or security. It is typically processed with minimal documentation and disbursed quickly compared to other kinds of loans.

The borrowed funds can be used for almost any financial need, including weddings, travel, education, or home renovation. Repayment is done in fixed monthly instalments, also known as EMIs, over an agreed tenure at a pre-set interest rate.

What Can You Use a Personal Loan For?

Personal loans are versatile and can be used for various purposes, tailored to your specific needs. Here are the common types of personal loans in India, explained in detail:

1. Wedding Loan

Weddings in India are grand events, often featuring multiple ceremonies and rituals. Many families take wedding loans to cover the costs without draining their savings. This helps manage expenses while enjoying the celebrations stress-free.

2. Travel Loan

If you love travelling but lack funds, a travel loan can help finance your trip. Banks and financial institutions offer these loans, allowing you to explore new destinations and repay them in EMIs later.

3. Home Renovation Loan

Beyond home purchase loans, you can also take loans for home renovation. This type of loan is designed to help you upgrade, remodel, or refurbish your living space without depleting savings.

4. Pension Loan

Specially curated for retirees, pension loans provide funds based on the applicant’s pension. Many banks offer loans worth multiple times the monthly pension amount, helping senior citizens meet financial needs post-retirement.

5. Personal Loan for Students

These loans help students finance education, courses, or degrees in India or abroad. With rising education costs, this loan type ensures students can pursue higher studies without financial hurdles.

6. Festival Loan

Banks and NBFCs also offer loans during festivals to help people celebrate without money worries. A festival loan provides short-term financial support to manage additional expenses during festivities.

7. Small Personal Loan

For small, urgent fund requirements, small personal loans are available. These are quick, short-term loans to manage immediate expenses like school fees or emergency purchases.

8. Personal Loan for Women

Designed to empower women financially, these loans are tailored to meet the needs of women for business, education, or personal growth. Many banks offer special rates and benefits under this category.

9. For Salaried Employees

Available to individuals aged between 21–60 years with a steady income, these loans are offered based on work experience and current employment stability. Salaried loans are among the most common type of personal loan.

10. For Government Employees

Exclusively for those working in government departments, these loans can be used for multiple needs. Eligibility requires proof of government employment.

How Does a Personal Loan Work?

The majority of loans function similarly to personal loans. After submitting your application with the required documents, the bank evaluates your creditworthiness and approves it accordingly.

Once approved, the loan amount is credited to your bank account. You can then use it as needed. Repayment is made through monthly instalments (EMIs), which are a fixed amount based on the loan amount, tenure, and interest rate.

Can You Get a Personal Loan Instantly?

Yes, it is possible to get a personal loan instantly. In India, many banks, NBFCs, and digital lenders offer quick loans with minimal documentation. The process is simple: apply online, upload basic documents such as your salary slip, Aadhaar card, and PAN card, and the approved loan amount is credited directly to your bank account. The applicable interest rate will depend on the lender's terms and conditions.

If you suddenly need funds, compare different banks and financial institutions to find the most suitable instant loan option.

Everything About Interest Rates, Tenure, and Repayment

Before applying for a personal loan, here are some important things to know:

Interest Rates: Rates vary depending on your credit history, income, tenure, and occupation. They are fixed and decided by the institution within RBI guidelines.
Ways to Apply: You can apply through Net Banking, the bank’s official website, ATM, or by visiting the nearest branch. Existing bank customers may get quicker approvals.
Loan Duration & Repayment: You can choose a repayment tenure that fits your budget. Loans are repaid via EMIs, making it easier to manage finances.

Documents Required for a Personal Loan

Although requirements may differ across lenders, commonly required documents include:

Proof of income (salary slips, bank statements, ITR forms).
Proof of identity and residence.
For self-employed applicants: authenticated copies of qualifications, business licenses, or income proof.

Final Words

A personal loan is a flexible financial tool that supports you in times of need — whether it's a major life event like a wedding, funding education, or handling emergencies. With multiple loan types designed to meet various needs, individuals can select the one that best suits their specific situation.

By repaying in EMIs, you can manage expenses without overwhelming your finances. Personal loans act as a strong support system for meeting life's demands without draining savings.

FAQs on Personal Loans

1. What are the different types of personal loans in India?

Some of the most common types include wedding loans, education loans, home renovation loans, travel loans, festival loans, and loans for salaried or government employees.

2. What is the most commonly availed type of loan in India?

Salaried personal loans and education loans are among the most frequently availed, thanks to simple documentation and flexible repayment options.

3. Can I use one personal loan for multiple purposes?

Yes, personal loans are multipurpose in nature. However, some lenders customise them for specific needs like weddings, travel, or education.

4. Are all types of personal loans eligible for tax benefits?

Not all personal loans offer tax benefits. For example, education loans may offer deductions under Section 80E, but travel or festival loans generally do not.

5. What is the eligibility for different types of personal loans?

Eligibility depends on age, income, employment, credit score, and bank-specific policies. For salaried loans, typically applicants must be 21–60 years old with steady income and stable employment.

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.