Personal loans: What is an instant loan? All you need to know

Instant personal loan is a type of unsecured loan which gives quick access to money with minimal documentation and fast approval, sometimes within minutes or a few hours. Instant personal loans are generally offered by banks, non-banking financial companies (NBFCs), or fintech lenders and are quite handy to address short-term financial needs, which include but not limited to medical emergencies, travel, or to buy a luxury item.

One of the key features of instant loan is the swiftness with which instant loans are approved. Many banks claim to offer approval within minutes or hours, and the loan disbursement can happen the same day. This is primarily because of the use of technology, where the lender assesses your creditworthiness through digital channels such as credit score checks, income verification, and more.

The amount of the loan varies from bank to bank, but typically, it ranges from a few thousand to a couple of lakhs. The repayment period is typically short and ranges from a few months to a few years (1 to 5 years).

It is vital to mention here that multiple applications in a short time can negatively affect your credit score.

These are the key things to know about instant personal loans:

1. Unsecured nature: Instant personal loans are unsecured, which means you don’t need to give any collateral (such as property or other assets) to get the loan. This makes them riskier for the banks, which charge a higher interest rates as compared to secured loans (such as home or car loans).

2. Eligibility criteria: Common eligibility factors include age, income level, employment stability, and credit score. A higher credit score (usually above 720) improves your chances of approval and securing better interest rates.

3. Interest rates: Due to their unsecured nature and the speed of disbursement, interest rates for instant personal loans can be higher than traditional loans. The rates vary by lender but generally range between 10 per cent and 20 per cent per annum, based on your credit score and other risk factors.

4. Fees and charges: Besides interest, there may be other fees such as processing fees, late payment fees, prepayment or foreclosure charges, and service taxes. It’s advisable to check the Annual Percentage Rate (APR), which includes the interest rate as well as fees, to understand the real cost of borrowing.

5. Minimal documentation: Instant personal loans usually require minimal documentation compared to traditional loans. Typically, you need proof of identity, proof of address, proof of income (salary slips, bank statements), and PAN. Many banks permit borrowers to upload these documents online, further speeding up the process.

6. Repayment: These loans are typically repaid in equated monthly instalments (EMIs) over the chosen tenure. Many banks offer the option of automatic deduction from your bank account to avoid missing payments.

7. Credit Score: Taking an instant personal loan and repaying it responsibly can boost your credit score. However, defaulting on payments can harm your credit score, making it harder to obtain credit in the future.

8. Prepayment: Some banks allow you to repay the loan before the tenure ends, partially or in full, but may charge a prepayment penalty. It is important to check these terms if you plan to repay early to avoid extra costs.

9. Purpose: Unlike secured loans such as home or auto loans, personal loans can be used for a slew of purposes such as medical emergencies, weddings, vacations, or debt consolidation.

Some of the things to consider before taking an instant loan

A. Affordability: Ensure that the loan EMIs fit within your budget.

B. Interest rate: Compare interest rates from various banks to look for the most favourable terms.

C. Terms and conditions: First, you need to understand all terms, conditions, and fees involved to avoid hidden costs.