Personal Loan: How It Works, Eligibility, Documents and EMI
A personal loan is a common form of borrowing in India. This guide explains, in simple language, how it works and what to understand before you approach any lender.
What is a personal loan?
A personal loan is an unsecured loan given by a bank or NBFC. Unsecured means you do not have to pledge property, gold or any other asset. You receive a lump sum and repay it in fixed monthly instalments over an agreed period.
People commonly borrow for medical expenses, weddings, travel, home repairs or consolidating other debts. The loan can generally be used for personal needs, though lenders may restrict certain uses.
How does a personal loan work?
- You choose an amount and tenure that fits your budget.
- The lender reviews your income, credit history and existing obligations.
- If the lender agrees, it shares a sanction letter with the interest rate, fees and terms.
- The amount is credited to your bank account and you repay through EMIs.
Every step, including the final decision, is handled by the lender. Read the loan agreement carefully before accepting.
Eligibility factors
Each lender sets its own criteria. Factors that are generally considered include:
- Age and employment type (salaried, self-employed)
- Monthly income and job or business stability
- Credit score and repayment history
- Existing loans and EMIs (often called the fixed obligation to income ratio)
- City of residence and employer profile, in some cases
Documents generally required
| Purpose | Commonly accepted documents |
|---|---|
| Identity proof | Aadhaar, passport, voter ID, driving licence |
| Address proof | Aadhaar, utility bill, rent agreement, passport |
| PAN | Permanent Account Number card |
| Income proof (salaried) | Recent salary slips, Form 16 |
| Income proof (self-employed) | Income tax returns, business proof |
| Bank statements | Usually last 3 to 6 months |
The exact list differs from lender to lender.
Interest rates
Personal loan rates are usually higher than secured loans because the lender has no asset as security. The rate depends on the lender's policy, your credit profile, income and loan amount. Rates are quoted per year and may be fixed or reducing-balance. Always ask the lender which method applies, and compare the annual percentage cost, not only the headline rate.
EMI basics
EMI stands for Equated Monthly Instalment, the fixed amount repaid to the lender every month. It is commonly calculated with this formula:
EMI = P × r × (1 + r)n ÷ [(1 + r)n − 1]
Here P is the loan amount, r is the monthly interest rate (annual rate ÷ 12 ÷ 100) and n is the number of monthly instalments. Each EMI has an interest part and a principal part; in the early years the interest part is larger.
A longer tenure lowers the EMI but increases the total interest paid. A shorter tenure does the opposite.
Loan tenure
Tenure is the repayment period, often ranging from a few months to several years depending on the lender. Choose a tenure where the EMI is comfortable within your monthly budget.
Fees and charges
- Processing fee, usually a percentage of the loan amount plus GST
- Late payment charges and penal interest on missed EMIs
- Prepayment or foreclosure charges, if applicable
- Cheque or EMI bounce charges
- Documentation or other administrative charges
Prepayment and foreclosure
Prepayment means paying part of the loan early; foreclosure means closing the loan fully before the end of tenure. Some lenders charge a fee, others do not. Check the rules in your loan agreement. Reserve Bank of India rules on prepayment charges differ by borrower and loan type, so verify the current position with your lender.
Things to consider before applying
- Borrow only what you need and can repay comfortably.
- Compare total cost, including fees, across lenders.
- Check your credit report for errors first.
- Avoid submitting many applications in a short time, as each may create a credit enquiry.
- Read the key facts statement and agreement fully.
- Use official lender websites or branches only.
Frequently asked questions
Does a personal loan need collateral?
Generally no. Personal loans are usually unsecured, though the lender may set other conditions.
Does checking eligibility affect my credit score?
A formal application can lead to a credit enquiry, which may be recorded in your report. Ask the lender how it checks.
Is the interest rate the same for everyone?
No. Lenders usually price loans according to the borrower's profile and their own policy.
Who decides whether a loan is approved?
Only the lender. Finora.in does not process or approve any loan.