What Is a Personal Loan? Meaning, Benefits and Eligibility

A personal loan is a type of installment loan provided to a borrower by lenders such as banks, credit unions, or online lenders. To obtain a personal loan, you must meet the lender’s requirements. Once approved, you can use the funds for almost any purpose, such as home repairs or major purchases. You are responsible for repaying the loan through regular payments over a set period, and these payments typically include interest.

Key Takeaways

• A personal loan is a type of credit extended to borrowers by lenders such as banks, credit unions, or online lenders.
• Most lenders have specific requirements—such as a minimum credit score and a debt-to-income (DTI) ratio—that borrowers must meet to get approved.
• If you are looking for a loan, conduct your own research by comparing different lenders to find the one offering the best loan terms, interest rates, and borrower requirements.

How Personal Loans Work

You can use personal loan funds for almost any purpose, such as home repairs, medical expenses, vacations, and major purchases. These loans are available from traditional lenders like banks and credit unions, as well as non-traditional sources like online lenders.

You can apply for a personal loan online, over the phone, or in person. Most lenders require a minimum credit score and proof of income. You may also need to provide collateral to secure the loan. In most cases, lenders can approve the loan within one to two business days, though complex applications or lenders with stricter underwriting processes may take longer.

If the loan is approved, the lender outlines the terms in the loan agreement. These terms include the payment amount and due date (usually monthly), the interest rate, and the loan tenure. The total loan amount, minus any applicable fees, is disbursed to the borrower.

Common Features of Personal Loans

Interest Rate and Monthly Payments

Lenders charge interest, which is the fee they receive in exchange for lending money. Your interest rate depends on several factors, such as your credit score, the type of loan, and any existing relationship you may have with the lender. Depending on the lender and the loan, rates can be either fixed or variable. Fixed rates remain constant throughout the loan term, whereas variable rates can fluctuate with market conditions.

Payments are fixed, meaning you know exactly how much you need to pay—usually on a set date each month. The payment amount includes both the principal and the interest. In the early stages of repayment, a larger portion of your payment goes toward interest. As time passes, a greater share of the payment goes toward paying off the outstanding principal balance.

A personal loan calculator can help you estimate your payments.

Repayment Terms

Lenders set loan repayment terms—usually spanning a number of months, such as 48 or 60—and you begin making payments by the due date, continuing until the loan term ends or the loan is fully paid off.

Secure vs. Unsecured Personal Loans

For a secured loan, you are required to pledge an asset with a value equivalent to the amount being borrowed. You can pledge assets such as bank accounts, cars, and real estate. This reduces credit risk; consequently, pledging collateral can increase the likelihood of loan approval and may also secure you a lower interest rate.

An unsecured loan is the most common type of personal loan. These loans are not backed by collateral and are generally based on your creditworthiness. Individuals with higher credit scores have a better chance of qualifying for unsecured loans; however, interest rates are often higher compared to secured loans because the lender is assuming greater risk.

Fees

Lenders may or may not charge fees to personal loan borrowers, including:

• Application or origination fee: This fee covers the costs associated with the application, underwriting, and loan-related documentation.
• Credit report fee: Lenders may charge the applicant a fee to obtain a credit report.
• Underwriting fee: Some lenders may charge a separate fee for the underwriting process; this process determines whether the borrower is capable of repaying the loan.
• Prepayment fee: This fee is charged if you repay the loan before the maturity date.

When Is a Personal Loan a Good Idea?

Taking out a personal loan is a suitable option when you need to make a major purchase or incur a significant expense. Such loans can be helpful during emergencies or when you wish to consolidate multiple debts into a single loan. Debt consolidation allows you to pay off high-interest credit card balances and other debts, leaving you with just one monthly payment that is easier to manage.

However, you should avoid taking a loan if you lack a steady income, cannot make monthly repayments, are already heavily burdened with debt, struggle to manage your finances effectively, and/or have a poor credit score. Furthermore, if you are able to create a budget for your expenses, try not to resort to a personal loan to cover them. Instead of approaching a lender, consider where you can cut down on unnecessary spending and how you might make better use of your money.

Personal Loan Interest Rates of Top Banks & NBFCs in India (2026)

Keyword	Personal Loan Interest Rate (Approx.)
Personal Loan EMI Calculator	10.50% – 36.00% p.a.
Bajaj Finserv Personal Loan	10.00% – 31.00% p.a.
SBI Personal Loan	10.30% – 15.30% p.a.
HDFC Bank Personal Loan	10.90% – 24.00% p.a.
Bank of Baroda Personal Loan	11.15% – 18.40% p.a.
Axis Bank Personal Loan	10.49% – 22.00% p.a.
ICICI Bank Personal Loan	10.85% – 16.65% p.a.
Groww Personal Loan	10.50% – 36.00% p.a. (Partner Banks/NBFCs)
Union Bank Personal Loan	11.35% – 15.45% p.a.
Yes Bank Personal Loan	11.25% – 21.00% p.a.
Punjab National Bank (PNB) Personal Loan	10.40% – 16.95% p.a.
Canara Bank Personal Loan	10.95% – 16.15% p.a.
Bank of India Personal Loan	10.85% – 16.85% p.a.
Indian Bank Personal Loan	10.00% – 15.50% p.a.
UCO Bank Personal Loan	10.95% – 16.50% p.a.
IDFC FIRST Bank Personal Loan	10.99% – 36.00% p.a.
Kotak Mahindra Bank Personal Loan	10.99% – 24.00% p.a.
IndusInd Bank Personal Loan	10.49% – 26.00% p.a.
Federal Bank Personal Loan	11.49% – 17.99% p.a.
Tata Capital Personal Loan	10.99% – 35.00% p.a.

How to Qualify for a Personal Loan

Every lender is different, but they have certain basic requirements for personal loans. These include:

• Minimum credit score: Even if a low score doesn’t necessarily disqualify you from getting a loan, a better score increases the likelihood of approval. According to Experian, a minimum score of 580 is generally required to qualify for a loan, while a score of 700 is needed to secure one with favourable terms. Before applying, check your credit score, improve it if necessary, and find out the score requirements of your preferred lender.
• Income: Lenders want to know that you can repay the loan, so you may need to provide proof of income, such as a pay stub or an employment letter.
• Debt-to-income (DTI) ratio: This is a financial metric that shows lenders what portion of your monthly income goes toward repaying your debt. The ideal target is 36%, although some lenders may accept a slightly higher ratio. To lower your ratio, reduce your debt as much as possible or increase your monthly income.
• Collateral: Securing a loan against an asset can increase your chances of getting approved. Collateral reduces the lender’s risk because, if you fail to repay the loan, they can seize the pledged asset. Keep in mind that even in such a scenario, you remain responsible for repaying any outstanding balance
• Co-signer: A co-signer signs the application with you and assumes responsibility for the loan if you are unable to repay it. It is best if this person has a good credit score, as this increases the likelihood of loan approval and helps you secure favourable terms.

How to Get a Personal Loan

If you want to take out a personal loan, the best place to start is with your bank or credit union. Having an existing relationship with the lender could lead to better offers or increase your chances of loan approval. Keep in mind, however, that large institutions may impose stricter criteria and offer loan terms that are not particularly favourable.

Online lenders can also be an option. Applying for and getting approved for a loan with them is easy—most lenders promise a response and funding within one to two business days. You can easily compare loan offers from multiple lenders since their terms are usually listed on their websites. However, if the lender does not have a physical branch, you may only be able to manage your loan online.

Check out some unsolicited offers received from lenders via mail. In many cases, you may already be pre-approved and can easily check the loan amount and interest rate without affecting your credit score.

Once you are ready, follow these steps to get a personal loan:

1. Gather information about lenders, their terms, and their requirements.
2. Once you have selected a lender, check if you can pre-qualify.
3. Collect all necessary documents, including a copy of your ID and proof of income. You may also submit your recent tax returns (usually from the past two years) if desired or required.
4. Fill out the application.
5. Wait for the decision. Be prepared, as the lender might request additional information or documents.
6. If approved, sign the documents and provide your banking details so the lender can deposit the loan funds.

If you do not receive approval, your lender should provide the reason. Contact them if you need more information.

Comparing Personal Loan Lenders 

If you are looking to take out a loan, it is advisable to compare different lenders and their offers. Here are some factors you should consider:

• Types of loans, such as secured and unsecured loans
• Eligibility criteria, such as credit score and monthly income
• Loan tenure options (i.e., the duration of the loan)
• Annual Percentage Rate (APR)
• Fees, such as origination and prepayment fees (these can increase the total amount payable to the lender)
• Customer service, which is important if you need to contact the lender regarding any questions or concerns

What Are Some Alternatives to Personal Loans?

If you do not wish to take out a personal loan (or are unable to do so), you might consider other alternatives. Some people use credit cards, lines of credit, or home equity loans, while others may borrow money from family and friends or utilise their savings—including funds withdrawn from retirement accounts—to meet their needs. Although these options may seem attractive, it is important to understand their potential impact on you. For instance, credit cards carry high interest rates, whereas taking a loan against a 401(k) could result in fines and penalties if you fail to repay the amount.

How Can I Improve My Chances of Getting a Personal Loan?

You can increase your chances of getting a personal loan by taking some or all of the following steps:

• Check and improve your credit report before applying
• Lower your debt-to-income (DTI) ratio
• Find a lender that best suits your situation
• Use collateral (an asset to pledge) to secure the loan
• Include a co-signer with a good credit score
• Apply only for the amount you need (and can repay)

Should I Get a Co-Signer for my Personal Loan?

A co-signer can help improve your chances of getting a personal loan approved. An individual with a good credit score can vouch for the loan and help you secure a lower interest rate. However, keep in mind that your co-signer’s credit score could be affected, and if you fail to make payments, they will be held responsible for the outstanding amount.

The Bottom Line

A personal loan can provide quick access to funds to meet your financial needs. Before applying, check your credit score and research various lenders to ensure you are eligible. Determine a loan amount that you can comfortably manage so as not to overburden yourself. Once the loan is approved, make timely repayments to avoid damaging your credit score.

Frequently Asked Questions