What is a personal loan? A guide to how it works & how to apply online

Life is full of surprises and sometimes you need quick access to funds to manage urgent expenses. It may be a medical emergency, a planned holiday, a wedding, or a home repair that cannot be delayed. In such situations, a personal loan can help you bridge the financial gap smoothly. To make the right choice, it is important to understand the personal loan meaning and know exactly how do personal loans work before applying.

We will see in detail what is a personal loan, how it functions and the complete process to apply online for a personal loan.

What is a personal loan?
 

A personal loan is an unsecured loan offered by banks and financial institutions. You do not need to provide any collateral such as property, jewellery or investments. Understanding what is a personal loan helps you make appropriate financial decisions. A personal loan gives you a fixed amount for a pre-determined tenure, with fixed interest rates and clear repayment terms.

Since it is unsecured, the loan approval mainly depends on your monthly income, repayment capacity, employment stability, and credit history. Lenders evaluate your overall financial profile before sanctioning the amount.

One of the biggest advantages is the freedom it provides. In the case of a personal loan, the loan amount goes directly to your bank account, allowing you to use the funds as needed.

Personal loans generally start from ₹50,000 and may go up to ₹50 Lakhs with repayment tenures between 12 and 60 months.

IDFC FIRST Bank's FIRSTmoney Personal Loan offers fast disbursal, within just 30 minutes (up to ₹10 lakhs). Before you apply for a personal loan, let's understand how the entire process works.

How do personal loans work?
 

Understanding how personal loans work helps you borrow wisely and improve your creditworthiness. Here is a simple step-by-step overview:

1. Application process
 

Your journey begins by submitting a personal loan application. You can apply for a personal loan either offline at a bank branch or through the simpler apply online personal loan feature. You need to provide personal details, employment information and income documents.

2. Eligibility assessment
 

The lender reviews your details against predefined criteria such as age, income, job stability, credit score and ongoing loans. This step determines if you qualify for the requested amount and your repayment capacity.

3. Loan approval and sanction
 

Once you pass the eligibility check, the lender sanctions the personal loan. You receive information about the approved amount, interest rate, processing charges and repayment tenure through a formal sanction letter.

4. Disbursement
 

After you accept the offer and complete pending formalities, the loan amount is transferred directly to your bank account. Most lenders disburse funds within 24 to 48 hours.

With FIRSTmoney personal loan by IDFC FIRST Bank, your loan amount can be disbursed within 30 minutes of approval.

5. EMI repayment
 

Repayment happens through fixed Equated Monthly Instalments (EMIs). Each EMI includes the principal plus interest. Your EMI stays constant throughout the loan duration, making budgeting easier. You can use the personal EMI calculator by IDFC FIRST Bank to estimate your EMI for a personal loan amount with a preferred tenure.

6. Loan closure
 

After completing all EMI payments, your loan is closed, and the lender issues a loan closure certificate.

Features of personal loans
 

Now, let us explore the various features of personal loans:

• No collateral required: Personal loans are unsecured loan. You do not need to pledge any assets.
• Flexible loan amounts: Depending on the lender and your profile, you can borrow as little as ₹50,000 or as much as ₹50 lakhs.
• Quick disbursal: Digital processing ensures funds reach your account quickly. You can apply online for a personal loan and get it approved within minutes.
  
  At IDFC FIRST Bank, your FIRSTmoney personal loan can be disbursed in less than 30 minutes.
• Convenient tenure options: Lenders generally offer repayment tenures between 12 and 60 months.

FIRSTmoney personal loan comes with tenures from 9 to 60 months.
 

• Fixed interest rates: Interest rates are fixed at disbursement, so your EMI remains constant, unless you restructure the loan.
  
  
• Multipurpose usage: You can use the funds for medical needs, education, home renovation, debt consolidation, travel, weddings or any other personal use.
  
  
• Minimal documentation: If you choose to apply online for a personal loan, you will need fewer documents, making the process quick and user-friendly.
  
  You don’t need to upload any documents for a FIRSTmoney personal loan. All you need is your PAN and Aadhaar number for application and your original PAN card (to be displayed, no need to upload) for the video KYC.
  
  
• Foreclosure charges: Generally, lenders charge a foreclosure charge of 2 to 6% of the outstanding loan amount if you choose to close your loan early.

At IDFC FIRST Bank, you can foreclose your FIRSTmoney personal loan with zero foreclosure charges.

• Top-up loan options: You can also get an additional loan over your existing personal loan, as per your eligibility.

With a FIRSTmoney personal loan, you can get multiple on-demand loans without applying from scratch, directly from the app.

Benefits of availing a personal loan
 

Understanding the benefits of a personal loan can help you make informed decisions:

• Quick access to funds: In emergencies, immediate financial help is important. Personal loans provide quick access to funds without much paperwork.
• No end-use restrictions: Unlike home loans or car loans which are tied to specific purposes, the personal loan amount can be used for any purpose.
• Improves credit score: Regular EMI payments help build a healthier credit record, making future borrowing easier.
• Helps with debt consolidation: You can combine multiple high-interest debts into one manageable personal loan at a lower rate.
• ttractive interest rates: Personal loans usually have interest rates ranging from 9% to 24% p.a.

IDFC FIRST Bank's FIRSTmoney personal loan interest rates start as low as 9.99%.

When should you consider a personal loan?
 

Here are situations where taking a personal loan is a practical choice:

• Medical emergencies
• Weddings and family events
• Home renovation or repairs
• Education or skill development
• Debt consolidation
• Travel and holidays
• Business cash flow support
• Buying urgent home appliances or electronics

Personal loan eligibility criteria
 

Before lenders approve a personal loan, they check several factors:

• Age: Generally from 21 to 60 years
  
  
• Income: Your monthly income should allow you to repay the loan hassle-free. Generally, your total EMI obligation should not exceed 50% of your monthly income.
  
  
• Employment stability: Salaried individuals should have a stable work history; self-employed individuals must show consistent business income.
  
  
• Credit score: It is preferrable to have a credit score around 750 for a personal loan.

A minimum score of 710 is required to apply for a FIRSTmoney personal loan. Higher scores improve approval chances.

• Existing debt: Banks assess your existing loan obligation to verify your repayment capability.

Documents required
 

To make your loan application smooth, keep these ready:

• Identity Proofs: Aadhaar, PAN
• Address Proof: Passport, utility bills, Aadhaar
• Income proofs: Salary slips, bank statements or ITR
• For self-employed: Business documents like registration certificates
• Passport-size photographs

Banks now accept digital documents, making the online application of a personal loan much easier.

For a FIRSTmoney personal loan, you don’t need to upload any documents. All you need is your PAN and Aadhaar number for application and original PAN card for video KYC.

How to apply for a personal loan online
 

Here is how the IDFC First Bank’s online application for a personal loan works:

1. Click on Apply Now on the website or app
2. Enter a few basic details
3. Choose your loan preferences
4. Link your bank account
5. Complete your video KYC

Interest rates and charges
 

Understanding the cost of your personal loan helps you plan better.

· Interest rates

Personal loan interest rates generally range from 9% to 24% p.a.

IDFC FIRST Bank offers competitive interest rates starting from 9.99% per annum on its FIRSTmoney personal loan. Your actual rate depends on,

o   Credit score: Higher scores (710+) qualify for lower rates

o   Income level: Higher, stable income can fetch better rates

o   Employment type: Salaried employees from reputable companies may get preferential rates.

· Processing fees

Most lenders charge a processing fee between 1% to 3% of the loan amount. Processing fees are transparent and communicated upfront in your sanction letter.

IDFC FIRST Bank charges 2% of the total loan amount (incl. GST) as a processing fee for its FIRSTmoney personal loan.

· Prepayment and foreclosure charges

Banks usually charge a prepayment or foreclosure fee in case you prepay or foreclose your personal loan.

For a FIRSTmoney personal loan by IDFC FIRST Bank you need to pay zero foreclosure fees, meaning you can close your loan early without any penalty.

· Late payment charges

Missing EMI payments attracts late payment penalties and negatively impacts your credit score. Always ensure sufficient balance in your account on the EMI due date.

· GST and other charges

GST is applicable to process fees and other charges as per government regulations. All charges are clearly mentioned in your loan agreement.

Tips to improve your personal loan approval chances
 

If you are unsure about your creditworthiness, here are a few tips to improve your approval chances:   

· Maintain a healthy credit score: Aim for a credit score of 750 or above. Pay all existing EMIs and credit card bills on time.

· Reduce existing debt obligations: Before applying, try to close smaller loans or reduce credit card outstanding.

· Show stable employment history: Salaried individuals should have at least 1 year of continuous employment. Self-employed applicants should demonstrate consistent business income.

· Apply for a realistic loan amount: Calculate your actual need and repayment capacity before applying.

· Avoid multiple simultaneous applications: Each loan application generates a hard inquiry on your credit report, which can lower your score.

· Maintain healthy bank account balance: A good average balance demonstrates financial stability.

· Choose an appropriate loan tenure: Balance your monthly comfort with overall cost efficiency.

Why choose IDFC FIRST Bank for your personal loan?
 

IDFC FIRST Bank offers a digital-first, zero foreclosure fees FIRSTmoney personal loan for all your urgent financial needs. Here are some key features of FIRSTmoney:

• Competitive interest rates starting from 9.99% p.a
• Quick approval and disbursal in 30 minutes
• Loan amounts up to ₹10 lakh
• Flexible tenures from 9 to 60 months
• Easy personal loan application with no documentation
• Zero foreclosure charges
• No hidden fees

Common mistakes to avoid when taking a personal loan
 

To keep the personal loan application process smooth, you should avoid the following mistakes:

· Borrowing more than needed: Taking excess funds increases your interest burden and monthly EMI.

· Ignoring credit score: Failing to check your credit score before applying can lead to rejection or higher interest rates.

· Not comparing offers: Accepting the first offer without comparing rates and terms may cost you significantly.

· Providing incorrect information: False or inaccurate details in your personal loan application can lead to rejection and impact future borrowing.

· Taking multiple loans simultaneously: Applying to several lenders at once negatively affects your credit score.

· Choosing very long tenures: Whilst longer tenures reduce EMIs, they significantly increase the total interest paid.

·Defaulting on EMI payments: Missing personal loan payments damages your credit score and makes future borrowing difficult.

· Not budgeting for repayment: Failing to ensure you can comfortably afford the EMI leads to default risk.