Personal Loan
A personal loan is an unsecured loan provided by banks and NBFCs to individuals for personal expenses — such as medical emergencies, home renovation, weddings, or travel — without requiring the borrower to pledge collateral.
Personal loans were among the fastest-growing retail credit segments in India through the 2010s and 2020s, driven by rising consumer aspirations, digital lending platforms that reduced application friction, and a large salaried middle class in need of short-to-medium-term credit. Unlike home loans or gold loans that were tied to specific assets, personal loans gave borrowers complete flexibility to use the funds as needed.
The defining characteristic of a personal loan was its unsecured nature. Because the lender had no collateral to fall back on in the event of default, personal loans carried higher interest rates than secured credit. Typical rates in India ranged from 10–12% per annum from premium public sector banks for customers with strong credit profiles, to 20–30% per annum from NBFCs and fintech lenders for higher-risk borrowers. The interest was typically calculated on a reducing balance method, meaning each EMI paid reduced the outstanding principal, and subsequent interest calculations were applied to the lower balance.
Loan tenures ranged from 12 to 60 months for most mainstream lenders, with some products extending to 84 months. Shorter tenures meant higher EMIs but lower total interest paid; longer tenures reduced the monthly payment but significantly increased the total interest outflow. Comparing two personal loans required looking at the Annual Percentage Rate (APR) rather than just the nominal interest rate, as the APR incorporated processing fees and other one-time charges that could make a nominally lower-rate loan more expensive in practice.
Eligibility for personal loans was assessed primarily on income, employment stability, credit score, and existing debt obligations. Salaried employees of large corporations or government entities commanded better rates and higher loan amounts than self-employed individuals, partly because their income was more verifiable and predictable. A minimum CIBIL score of 700–750 was often required by mainstream banks, though digital lenders used alternative data models that could approve loans for borrowers with thin or no credit files.
From a personal finance standpoint, personal loans were most appropriate when used for genuine emergencies or high-return investments in education, and least appropriate when used to finance discretionary consumption. The interest cost represented a real reduction in wealth, and borrowers who repeatedly used personal loans to fund lifestyle expenses often found themselves in a worsening debt spiral over time.