How Does a Personal Loan Works

  • Updated on: 29 Dec 2023
  • Published on: 10 May 2023
How Does a Personal Loan Works

Knowing how do personal loans work is crucial as it will help you secure quicker and more seamless access to funds. A personal loan can help you achieve your planned goals or meet urgent needs. Whether it is to remodel your home, upskill yourself, or pay for medical emergencies, it is a fast and convenient option to get funds.

Read on to learn how personal loans work and the process you can follow to apply.

How do personal loans work?

One of the easiest and fastest methods to obtain credit and repay in monthly instalments is a personal loan. A reason behind this is that it is an unsecured loan. Since it doesn’t require you to pledge any asset as security or collateral, the paperwork required is minimal  and the asset evaluation process is eliminated.

All you need to do to apply for the loan is share key details about yourself, employment and income. When the lender receives your application, they assess your repayment ability and past behaviour with credit. 

They may do this through AI (Artificial Intelligence) and ML (Machine Learning) processes for speedier and more inclusive processing.

Once the verification is through, your loan application is approved or rejected. If approved, the lender disburses your loan and you will receive the amount in your bank account. Once you get the funds, you can use them for any purpose without restrictions.

To repay the loan, you will pay EMIs or equated monthly instalments for your chosen tenure. Based on the lender, this may range from a few months to 5 years. 

EMIs not only include the loan amount but also the personal loan interest rate. This rate is the cost of borrowing funds. So, remember to choose a lender with affordable rates that can help you repay the loan stress-free.

You can also repay the loan amount before the tenure ends. This is called prepayment and while some lenders have prepayment charges, others do not. Prepaying your loan helps you reduce your total interest dues, but do ensure that the charges are minimal and not more than your interest savings.

How does interest work on a personal loan?

Personal loan interest is the cost of borrowing that lenders charge as an annual percentage of your loan amount and has a significant impact on your EMIs. This is because lenders add the interest amount to your principal amount and you pay the total sum in EMIs. 

To calculate your interest, lenders use the following formula: 

Interest = Principal x Interest Rate Per Annum/12

The resultant amount is added to the borrowed sum to get the total payable amount. Your interest amount will also vary depending on the type of interest rate you choose and whether the lender uses a reducing balance method or a fixed method. Some other factors that influence your personal loan interest rates include:

  • Your income and credit score
  • Credit and repayment history
  • Relationship with the lender
  • Debt-to-income ratio
  • Loan amount
  • Tenure 

While you can do manual calculations to gauge your EMI amount, you can also use online calculators that simplify the task and generate error-free results in a few seconds. To get affordable rates, you need to showcase a good repayment ability and behaviour. 

How does a personal loan impact your credit score?

When credit bureaus calculate your score, they consider information given by financial institutions, including your lenders. Based on this, they understand your credit history, utilisation, length, types of credit and the new credit applied to calculate your credit score. 

By repaying your EMI on time, you can demonstrate a good repayment history, which positively impacts your credit score. Taking a personal loan and repaying it on time helps lenders understand your experience in managing credit.

However, when you apply for multiple personal loans in a short period, this can temporarily decrease your score and imply that you are credit-hungry. Lenders see this as a sign of high risk of default and therefore, may not approve your application. So, remember to keep an eye on how frequently you are applying for credit. 

What is the personal loan process to apply and get funds?

Personal loans have a simple application process. Follow the steps listed below:

  • Step 1: Compare personal loan offers and current interest rates to choose a lender
  • Step 2: Check the eligibility criteria of the lender to ensure you qualify for the loan
  • Step 3: Calculate the EMI amount using the personal loan EMI calculator
  • Step 4: Apply for the loan online or offline by filling out the form
  • Step 5: Attach the required documents, such as statements, ID and address proof

Once you submit your application, await verification and on receiving approval, sign the loan agreement. The lender will then transfer the loan amount to your bank account.

Now that you know how do personal loans work, you can get started right away. At Fibe, you can get an Instant Personal Loan of up to ₹5 lakhs in just a few minutes with a simple online application. 

Moreover, our assessment process is not based on credit scores but on an alternate credit scoring method that allows you to get a loan even if you are new to credit. Download the Fibe Personal Loan App or register on the website to have access to funds at your fingertips! 

FAQs on How Does a Personal Loan Work

How do personal loan payments work?

Your personal loan repayment amount is the principal amount plus the interest levied by the lender. The lender will give you an EMI amount that you need to pay for your chosen tenure based on the total sum calculated. You can pay the EMI online through various modes, depending on your lender. 

What is the process of applying for a personal loan?

Here is the step-by-step process for a personal loan application: 

  • Step 1: Compare offers and check your eligibility with the chosen lender
  • Step 2: Fill out the application form and wait for approval
  • Step 3: Submit the required documents when approved  
  • Step 4: Sign the loan agreement and repay the loan as per the terms

How long is the approval process for a personal loan?

The approval process varies across lenders and depends on your application too. At Fibe, you can get approval for loans of up to ₹5 lacs in just 2 minutes. 

What are the stages of the loan approval process?

After application, personal loan approval involves the following steps:

  • Eligibility check by the lender 
  • Document submission
  • Verification by the bank
  • Underwriting and documentation process 
  • Loan sanction and disbursal

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