3 Different Types of Personal Loans

Personal Loans are unsecured loans that are not supported by collateral. These loans can help you avert a financial crisis or even help you manage your finances better in times of needs. There are 3 main types of personal loan that you can opt for. Let’s look at them.

1. Short-term Personal Loans These loans can be a perfect option to answer your short-term or immediate needs. With a duration ranging from 6-months to 2-year, the interest rate on these loans may be slightly higher than the long-term loans, which also means higher EMIs.
2. Long-term Loans With a duration ranging from 1-year up to 7-years, long-term personal loans come with slightly lower interest rates. These can be the perfect option when you may need some more time to pay off the loan.
3. Overdraft Personal Loans In this, you are qualified for a loan amount, and you are only charged interest on the loan amount you use. Thus, no interest is charged on the amount you do not use.

Ask yourself the following four questions to determine between the three options .

1. How Much Loan Amount You Need? Long-term personal loans come with a higher limit, usually up to Rs 50 lacs, whereas you can take short-term loans up to Rs 15 lacs. Thus, the amount will help you ascertain the type of loan you need.
2. What is Your Preferred Duration of the Loan? If you only need a small amount of loan and intend to pay it back in a year or less, short-term personal loans may be the right option for you. If you need more time, go for long-term loans. In case you are not sure of the duration of the loan amount, you can opt for the overdraft facility.
3. What is Your FOIR (Fixed Obligations to Income Ratio)? If you have very low fixed obligations to the income, you earn every month, clearing off the loan as soon as possible through a short-term loan may be a better idea. However, if your FOIR is high, you may need to reduce the EMI burden with a longer duration personal loan.
4. Do You Intend to Pre-close the Loan? This is especially important if you are choosing a long-term personal loan. If you intend to close the loan before it completes its full duration, a short-term loan may be a better idea. This is because you may be charged a pre-closure penalty on the amount due, which can increase your loan's overall cost.

Personal loans are multi-purpose loans allowing you to use the loan amount for anything you want. This is unlike other types of credit, where you can only use the loan amount for specific purposes, such as a car loan for buying a car, a home loan for buying a home, or an education loan for paying education fees.Moreover, the purpose of a personal loan can also determine the type of personal loan you will need. Let's look at some of the popular types of personal loan .

• Wedding Weddings in India can cause a huge dent in your pockets. Moreover, with unplanned expenses running in thousands and lacs, personal loans can be the best way to combat the rising costs. If you have budgeted very well for a wedding, a long-term loan may be the right choice. However, an overdraft facility may be a good option to cover all those unplanned expenditures that may come your way.
• Travelling Travelling can be expensive. However, with personal loans, you can ensure that you have the best family vacation without worrying about the temporary cash crunch. A short-term loan may be the best option if you’re taking a personal loan for covering travelling expenses.
• Medical Emergencies While medical insurance is the right tool to protect yourself financially against the rising medical costs, some expenses are not covered by the policy. A personal loan can ensure that you are covered end-to-end, even if you already have a health care policy. Depending on the amount you intend to borrow, you can opt for a short-term or long-term loan.
• Higher Education While education loans can cover these expenses at lower interest rates, sometimes you may not get an education loan on the course you opt for. But this shouldn't stop you from achieving your academic goals. A long-term personal loan can help you sponsor your education plans. However, if you opt for a low-cost online course, a short-term loan may be the better option.

While these are just some of the purposes, you can practically use the amount for anything unless it is illegal. Depending on the loan amount, duration, and current financial health, choose the right type of personal loan that suits your needs.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.