What is a Personal Loan? A Complete Guide

Personal loans are useful facilities that are ideal to finance several things. Whether it is for an emergency medical bill, expensive purchase, or education, the types of loans personal loans today are wide and varied. However, not understanding how these loans work would mean you might lose more than you gain. To help you out, here is a complete guide on how personal loans work, and how you can use it for your advantage.

Definition of a Personal Loan

A personal loan is simply defined as the borrowing of money, which has to be repaid in a few years (typically in 2 to 5 years). This repayment is done in monthly instalments and is paid with interest. The interest can vary, depending on the lender and the loan term.

Elements of a Personal Loan

Typically, there are 5 elements in a personal loan, however, this can depend on the lender.

Interest Rate
Loan interest rates are defined as the cost of borrowing money, which is charged as a percentage of the entire loan. Depending on the loan amount, the loan term, and your credit score, this must be paid every month to the lender until the end of the term.

Loan Term
The loan term refers to the period in which you have to repay the debt. This can vary, depending on the lender. For example, the loan term of the Relax-Personal Loan offered by HNB FINANCE can be obtained for a maximum period of 5 years.

This is the cost incurred for preparing the loan. These fees depend on how the financial institution arranges a personal loan. This can range from documentation fees, lawyer fees, service charges, etc.

To make sure the risk of the loan stays at a minimum, official documents have to be submitted concerning the individual’s salary, credit score, collateral, along with the application requesting for the loan.

Other Features
There are several elements in a bank loan or a loan provided by a financial institute, such as penalty fees, additional interest rates, and specifics of the collateral used to secure the loan. These vary, depending on the financial institution you obtain the loan from.

How a Personal Loan Works

Understanding how a personal loan works is quite simple. Take HNB FINANCE’s Relax-Personal Loan as an example.

If you are to take a loan that ranges from LKR 75,000 to LKR 3,000,000, it can only be done against 2 guarantors or mortgages. It is possible to obtain a loan of up to LKR 12,000,000 against mortgage over immovable property.

The loan term is generally determined with your ability to repay the loan, including the interest. This can range from 1-5 years.

Once the loan is confirmed and given to you, you are then required to repay the loan with interest in monthly instalments, until the term ends.

In case you are not able to repay the loan, it will lead to penalty fees and additional interest, depending on the outstanding amount.

Requirements to Obtain a Personal Loan

There are a few requirements to obtain an easy loan like our Relax-Personal Loan.

Age – Individuals in the age group of 24-50 are eligible to apply.

Credit Score – Individuals should possess a satisfactory credit score approved by the CRIB (Credit Rating Information Bureau of Sri Lanka).

Confirmation of Income – Individuals should have the capacity to repay the loan within the given period. Therefore, individuals must submit documents that confirm an adequate source of income.

Collateral – Depending on the loan amount, it is necessary to have 2 guarantors or mortgages as collateral. This is to reduce the risk involved when defaulting payment.

Now you can use this knowledge to obtain and utilize a personal loan like our Relax-Personal Loan to its full extent, making your life all the more convenient.