Lower interest rates, ease of access compared to other lending options, and no collateral requirement have worked in the favour of personal loan. Further, minimal documentation and quicker disbursal have made it the most preferred option among borrowers for financing lifestyle goals and fund shortages. Here are some of the top reasons why personal loans are gaining popularity:
No-end use restriction
The proceeds from a home loan, business loan or auto loan are used to meet specific financial requirements. On the other hand, the proceeds from personal loans can be used for any purpose, like financing medical expenses, education, vacations, weddings, home renovations, or home extensions. In addition, the personal loan can be used for consolidating debt or for purchasing the latest electronic gadgets or financing any other shortfalls.
No security or collateral is required
Personal loans are unsecured i.e., borrowers are not required to provide any collateral or security for availing the loan. Instead, the lenders evaluate personal loan applications on the basis of their applicant’s net monthly income, occupation and credit score. Lenders take on greater credit risk when they offer personal loans without collateral or security, which makes them to follow stringent policies for the personal loan approval process. This is different from other loan types where questions like can you have two VA loans at the same time or matters like if there are title loans without proof of income near me often arise.
Quicker loan processing and disbursals
Compared to other loan products like car and home loans, personal loans have faster loan processing and disbursal times. When applying for a personal loan offline, the majority of banks and NBFCs state that the loan will be funded in a few business days. However, the increased adoption of digital onboarding has made it possible for numerous lenders to provide same-day loan disbursals through end-to-end online processes. This personal loan feature has been very helpful for people who require immediate funds.
Cheaper than credit cards
Personal loan interest rates are usually lower than the interest rates of credit cards. Private lenders and some public-sector banks usually provide personal loans at lower interest rates. When it comes to credit cards, the interest rate on outstanding balances usually starts at 40% p.a. These rates can be even higher for cash withdrawals made using credit card.
Minimal to no documentation
For personal loans, banks, lenders don’t require as much documentation as they do for home loans, loan against property or other secured loans. Applicants are required to submit a few documents to their respective banks or NBFCs as proof to establish their residence, income, and identity. Same set of documents are used for residence proof and identity proof for both salaried and self-employed applicants, except for income proof documents. For example, in the case of personal loans for salaried employees, applicants would have to submit their salary slips and bank account statements for the past 3–6 months as income proof documents. In case of self-employed applicants, income tax returns, audited balance sheet and P&L a/c statement of last 2 years. In case of pre-approved personal loan offered to existing customers, fresh documentation is usually not required as the customer’s KYC details already exist in the lender’s database.
Pre-approved offers
Many lenders provide pre-approved personal loans to their select customers having strong credit histories and good credit profiles. Banks and NBFCs usually offer immediate or same-day loan disbursals for these pre-approved personal loans with little to no documentation requirements.
