Personal loan, offered by banks to borrowers, is often referred to as an unsecured loan. The credit extended by banks to borrowers is categorized into secured and unsecured loans. While secured loan is backed by the assets of the borrower, it is relatively easy for banks to render such credite. But with unsecured loan, it is comparatively difficult since there is no asset against which the bank can possibly provide the credit to the borrower.
In unsecured personal loan, the borrower may apply for it at the bank. However, banks also come up with special offers to credible customers, giving them an opportunity to apply and receive credit. Such credite are also extended to borrowers who have bank accounts in the same bank and the bank transactions in the bank account have been active in the past one year.
Personal loans can be taken by customers for any reason and it is not necessary for the customer to inform the bank the reason for taking the loan. The loan could be taken for purchasing household items, organizing ceremonies, taking a holiday or any other reason. It could also be taken for the purpose of expanding one’s business. The need for capital could arise anytime for a businessman. A personal loan could be useful at such times for the businessman.
The bank assesses the financial history of the borrower before extending the loan. The assessment could include reviewing the bank account of the borrower. It is important for the bank to understand the nature of work of the borrower. If the borrower is a businessman or self-employed, his business is assessed through the review of balance sheets and annual turnover.
If the borrower is employed at a company, his salary is assessed. In usual cases, the bank extends credit to the customer when it gets convinced that the monthly salary or annual income is considerably high to the loan amount raised by the borrower. The borrower’s monthly income should be more than the monthly installment he has to pay to the bank.
A personal loan is the credit extended by the bank for short-term only. Such short-term credite have higher rate of interest and there are fixed dates before which the borrower is expected to pay the equal monthly installments every month. The entire principal amount along with the interest charged has to be returned back to the bank within the stipulated time. In personal loans based on business, credite are also offered by the bank taking into account the commercial viability of the business.
Although interest rates would be comparatively higher, the possibility of recovering loans is also better. Hence, the underwriter assesses the value of the business and sanctions the loan accordingly to the borrower. As personal loans are unsecured credite, they are not given away easily. If there are cases where such loans have been disbursed without assessing the repayment capacity of the borrower, the loan is referred to as sub-prime loan. Here, the sub-prime is the borrower.