A personal loan is a small amount borrowed from a financial institution or bank to finance individual financial requirements. It may be utilised for multiple purposes, like buying equipment, business expansion, or meeting personal expenses. When you borrow a loan, you must repay the borrowed amount and the payable interest over a period of time. There are various kinds of personal loans, including term loans and overdraft facilities. This blog explains everything you need to know about small personal loans.
What is a Small Personal Loan?
A small personal loan is a sum you borrow to cover personal financial requirements. Banks, credit unions, or other financial institutions usually provide small loans. The loan is available for various purposes, like buying equipment, paying medical bills, or financing personal expenses. Personal loans may be secured or unsecured. In a secured loan, you need to provide collateral, which can be property, equipment, inventory, or stocks. If you don’t repay the loan, the asset pledged can be claimed by the lender. An unsecured loan does not require collateral but comes with a higher interest rate.
Why Do People Require Personal Loans?
People may require a personal loan for various reasons, such as:
Medical Bills
Covering unforeseen medical expenses such as accidents or operations that are not comprehensively covered by insurance. Personal loans can help cover the hefty medical bills, allowing people to access essential treatment without delay.
Home Renovation
Renovating a house is costly, particularly for extensive renovations such as kitchen renovations or additions to rooms. A personal loan provides an avenue for funding home improvements without using savings or credit cards.
Education
For tuition, books, or other learning materials, education is among the primary reasons individuals borrow personal loans. It enables individuals to invest in their future by financing educational costs when they lack sufficient savings.
Types of Small Personal Loans
The following are the types of small personal loans:
Term Loans: These are loans that you take for a certain period. You need to repay the loan in periodic instalments. Term loans can be short-term (a few months) or long-term (a few years).
Overdraft Facilities: This is a flexible loan that lets you borrow within a limit. You can take the amount when you need it and pay interest only for what you borrow.
Factors to Consider Before Applying for a Small Personal Loan
Following are the factors to consider before applying for a small personal loan:
Credit Score: Lenders tend to check your credit score to determine whether you qualify for a loan. A better score may help you get more favourable loan terms.
Loan Amount: Ensure the loan amount is sufficient to address your needs. Do not borrow excessively high because repayment becomes difficult.
Interest Rates: Compare interest rates of different interest rates to get the one that suits your budget and financial goals. The higher the rate, the more expensive the loan will be.
Repayment Terms: Determine how much time you want to repay the loan. Opt for a term that suits your financial condition.
Steps to Apply for a Small Personal Loan
Here is how you can apply for a small personal loan.
Check Your Credit: Check your credit score before applying for a personal loan. If you have a poor credit score, take the necessary measures to improve it.
Gather Documents: Collect all the documents you need to submit, such as your identity proof, address proof, income proof, and employment details.
Compare Lenders: Different lenders offer different loan terms. Compare interest rates, repayment terms, and other terms before choosing a lender.
Fill Out the Loan Application: Once you gather all the documents, fill out the application and make sure you give precise details and documents.
Submit Your Application: Once you have filled out the loan application, recheck the application, and if it is correct, then submit the application form.
Wait for Approval: After submitting your application, the lender will go through the application, and if they agree to the loan, the amount of the loan will be deposited into your bank account.
Difference Between Small Personal Loans and Business Loans
Let’s now take a quick look at small personal loans and business loans. The table highlights the difference between a business loan and a small personal loan.
| Feature | Small Personal Loan | Business Loan |
| Purpose | A small personal loan is used for personal financial needs, such as medical bills or home renovations. | Specifically for business-related expenses (e.g., equipment purchase, operational costs) |
| Collateral | Typically unsecured; no collateral required | Often secured; may require collateral like business assets |
| Loan Amount | Generally smaller amounts, often a few thousand rupees | Business loans usually involve larger amounts to cover significant business expenses and investments. |
| Repayment Terms | Flexible repayment terms, often shorter duration | Longer repayment terms tailored to business cash flow |
Conclusion
A small personal loan can help finance your personal financial needs. Understanding the different types of loans, their purposes, and the application process is essential when making a decision. It’s important to consider factors like credit score, loan amount, interest rates, and repayment terms to ensure the loan fits your financial situation. Research loan options and choose the one that aligns with your goals and financial needs to make wise decisions.
