How Does a Personal Loan Work?

A personal loan is one of the fastest and most flexible ways to access funds in India. Whether you need money for medical emergencies, weddings, travel, home renovation, or debt consolidation, a personal loan offers quick access to funds without collateral.

But how does a personal loan actually work? What determines your EMI, interest rate, and approval chances?

At Saarathi.ai, we have observed that many borrowers apply without fully understanding the process, which leads to avoidable rejections or higher EMIs. In this guide, we break down how a personal loan works step-by-step so you can borrow smartly and confidently.

What Is a Personal Loan?

A personal loan is an unsecured loan offered by banks and NBFCs. Since it does not require collateral like property or gold, approval is based mainly on:

• Your income

• Your CIBIL score

• Employment stability

• Existing loan obligations

Lenders regulated by the Reserve Bank of India set guidelines for fair lending and transparency.

Step-by-Step: How a Personal Loan Works

Step 1: Application

You submit a loan application online or offline with basic details:

• PAN

• Aadhaar

• Income proof

• Employment details

On digital platforms like Saarathi.ai, the process is fully paperless and can take just minutes.

Step 2: Credit Assessment

The lender checks your credit history from TransUnion CIBIL and reviews:

• Credit score

• Repayment history

• Credit utilisation

• Existing EMIs

Higher scores usually result in better offers.

Step 3: Loan Offer

If approved, the lender shares:

• Loan amount

• Interest rate

• Tenure

• EMI

• Processing fees

Instead of accepting the first offer, you can compare personal loan offers on Saarathi.ai to find the most suitable option.

Step 4: Disbursal

Once you accept the offer and complete verification, the funds are disbursed directly to your bank account.

Many lenders now provide same-day or 24 to 48-hour disbursals.

Step 5: EMI Repayment

You repay the loan in Equated Monthly Instalments over a fixed tenure, typically 12 to 60 months.

Each EMI includes:

• Principal repayment

• Interest component

Auto-debit ensures timely payments.

How Is Personal Loan EMI Calculated?

EMI depends on:

• Loan amount

• Interest rate

• Loan tenure

For example:

If you borrow Rs 5 lakh at 11 percent interest for 3 years, your EMI will be around Rs 16,400 approximately.

Longer tenure means lower EMI but higher total interest paid.

At Saarathi.ai, our AI-based recommendation engine helps you evaluate the right balance between EMI affordability and total interest cost.

Interest Rates on Personal Loans in India

Interest rates usually range between 10 percent to 24 percent depending on:

• Credit score

• Employer profile

• Income level

• Existing debt

According to financial coverage in The Economic Times, lenders are increasingly using digital underwriting models to price loans more accurately based on risk.

Borrowers with 750+ CIBIL scores often receive lower interest rates.

Eligibility Criteria for Personal Loans

While criteria vary across lenders, common requirements include:

• Age between 21 to 60 years

• Stable income

• Minimum monthly salary of Rs 15,000 to Rs 25,000

• Good credit score

Self-employed applicants may need business income proof.

Instead of guessing eligibility, you can ask eligibility questions via Saarathi AI expert before applying.

Charges Associated with Personal Loans

Before accepting a loan, review these costs:

• Processing fee

• Prepayment charges

• Late payment penalty

• Foreclosure fee

Transparency is key. Always check the total cost of borrowing, not just EMI.

Advantages of Personal Loans

• No collateral required

• Quick approval and disbursal

• Flexible end-use

• Fixed EMIs

• Fully digital processing

For urgent needs such as medical emergencies or wedding expenses, personal loans are often the fastest option.

Disadvantages to Consider

• Higher interest compared to secured loans

• Strict credit score requirements

• Penalties for late payments

Borrow responsibly to avoid financial stress.

When Should You Take a Personal Loan?

A personal loan is suitable when:

• You have an urgent financial need

• You do not have liquid savings

• You can comfortably manage the EMI

• The purpose justifies the cost

Avoid taking personal loans for unnecessary lifestyle expenses.

How Does Prepayment or Foreclosure Work?

Many lenders allow:

• Partial prepayment

• Full foreclosure

However, some may charge fees if closed before a certain period.

Check terms carefully before signing.

What Happens If You Miss an EMI?

Missing EMIs can lead to:

• Late payment charges

• Lower CIBIL score

• Recovery calls

• Legal action in extreme cases

Your repayment behaviour is reported to credit bureaus like TransUnion CIBIL, which impacts future loan approvals.

How Saarathi.ai Makes Personal Loans Smarter

Saarathi.ai is an AI-powered digital lending marketplace connecting borrowers with 110+ banks and NBFCs.

With Saarathi.ai, you can:

• Compare multiple loan offers in one place

• Get AI-driven personalised recommendations

• Track your application in Saarathi Bazaar dashboard

• Experience a fully paperless process

• Reduce unnecessary hard enquiries

Instead of applying to multiple lenders separately and impacting your credit score, you can apply strategically using AI insights.

Common Mistakes to Avoid

• Borrowing more than needed

• Ignoring processing fees

• Choosing the longest tenure blindly

• Applying to multiple banks at once

• Missing EMI payments

Financial discipline ensures personal loans remain helpful, not burdensome.

FAQs

1. How long does it take to get a personal loan?

Digital lenders may approve and disburse within 24 to 48 hours, depending on verification.

2. Is a personal loan better than a credit card loan?

It depends on interest rates and tenure. Personal loans often offer structured repayment with fixed EMIs.

3. Can I get a personal loan with low CIBIL score?

Possible, but interest rates may be higher and approval chances lower.

4. Can I prepay my personal loan early?

Yes, but check for foreclosure charges.

5. Does personal loan affect credit score?

Yes. Timely repayment improves score, while missed EMIs reduce it.

Conclusion

Understanding how a personal loan works helps you borrow confidently and responsibly. Remember:

• Approval depends on credit profile and income

• EMI includes both principal and interest

• Longer tenure reduces EMI but increases total cost

• Timely repayment protects your credit score

Before applying, compare offers and choose wisely.

Discover personalized personal loan options on Saarathi.ai today and borrow smarter with AI-powered guidance.