Planning for a dream holiday or yearning for a lifestyle gizmo? Desiring to gift someone a diamond ring or thinking of renovating your house? Still more ... if you are looking to meet expenses for child's education or daughter's marriage or if it just a temporary cash crunch, personal loan answer all your needs and desires.

Understanding personal loan: The need

A personal loan is a credit extended to meet your personal needs / requirements. Generally these loans are unsecured, i.e. as a borrower you are usually not asked for security backup or collateral against the borrowed amount. The personal loan you get is based entirely on your integrity and repayment capability.

A personal loan can be availed from any of the major banks or finance companies.

Getting a personal loan: Loan amount & interest rates

The loan amount and eligibility criterion varies from bank to bank. The offering bank will assess you on basis of multiple parameters, which include your repayment capacity, place of work, past obligations, work experience, residence and age. The bank also considers these set of factors for determining the lending rate.

If the lending bank perceives higher risk in extending credit to an applicant, it may choose not to sanction the loan or charge a higher interest rate in accordance with the perceived risk. At times, banks ask for additional security in the form of a personal guarantee based on risk profile of borrower.

Thus, the interest rates on your personal loan could vary from anywhere between 15 to 25 percent depending on your risk profile, income level, and nature of employment.

Say for instance, if you are working in a reputed organization you might get a loan at lower rate, when compared to a self employed individual who might end up getting a loan of the same amount at a higher rate of interest for the same period.

The basis for interest rates can be fixed, floating or flat. Personal loan on flat rates are most expensive and charge same interest on principal amount throughout the tenure of loans. In fixed and floating basis, rates are calculated on reducing balance and hence these loans are comparatively less expensive.

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