Personal loan
An unsecured loan from a bank that can be used for any purpose — such as paying off debt, a marriage, or a vacation — with no collateral required.
In plain language
A personal loan is the most flexible loan a bank offers, because it comes with almost no strings attached to how you spend it.
The workbook's own description: this loan can be utilised for any purpose, for example paying debt, marriage expenses or vacation expenditure. Unlike a housing loan or a vehicle loan, it is not tied to buying any specific asset.
And the workbook adds the one fact that most distinguishes it from a home or gold loan: no collateral security is required for this type of loan.
How it works
Because there is no collateral behind a personal loan, the workbook's broader lending framework — the 5 Cs of credit (capacity, character, capital, collateral, conditions) and the credit score from a bureau such as CIBIL — carries more weight in the bank's decision than it would for a loan secured by property or gold.
The workbook gives no interest rate, tenure or loan-amount figure specific to a personal loan in this booklet — those depend on the individual bank's own terms and the applicant's credit profile, not on a number stated here.
A worked example
Farhan needs Rs 2,50,000 to cover his sister's wedding expenses. He has no property or fixed deposit he wants to pledge, so he applies for a personal loan instead of a loan against a fixed deposit.
The bank checks his CIBIL credit score, his last three months of salary slips and bank statements, and — because there is no collateral securing this loan — relies more heavily on that credit history to decide whether to lend. His score is high, and the loan is sanctioned.
Had Farhan instead wanted the money for a vehicle, the same bank would have offered a vehicle loan tied to the car itself, at potentially different terms, because that loan would be secured by the vehicle rather than unsecured like this one.
Why NISM asks about it
Chapter 8 (Borrowing-Related Products) lists the personal loan first among the named loan types, immediately followed by the 5 Cs of credit and the role of a credit score and CIBIL in loan approval. Expect a question testing which loan types require collateral and which — like the personal loan — do not.
Common exam traps
- No collateral is required for a personal loan — a question implying otherwise is testing this exact point.
- A personal loan can be used for any purpose. A housing loan, vehicle loan, education loan and gold loan are each tied to a specific use; a personal loan is not.
- The workbook gives no interest rate or amount limit for a personal loan — treat any such figure in a question as the question's own assumption.
Check yourself
1.Which statement about a personal loan is correct?
- a)It may be used only for medical emergencies
- b)It can be utilised for any purpose and requires no collateral security
- c)It requires gold as security
- d)It is available only to salaried employees
Show the answer
Answer: (b) It can be utilised for any purpose and requires no collateral security
"Personal Loan - This loan can be utilized for ANY PURPOSE, for example, paying debt, marriage expenses or vacation expenditure. NO COLLATERAL SECURITY IS REQUIRED for this type of loan." Those two features are also why it is the most expensive category of ordinary borrowing: the lender parts with money having nothing to seize and no idea what the money will do, and prices that risk into the interest rate. So "quick and no security needed" is a description of cost, not a discount. Option (c) describes the gold loan, which is "given only on providing gold as a security to a bank or any other lending institution." The practical rule that follows: if a purpose-specific loan exists for what you are doing — education, housing, vehicle, agriculture, consumer durable — using a personal loan instead means paying more for the same money.
2.A family needs ₹4,00,000 for a child's engineering course. The child holds an admission offer. A personal loan is available immediately. What is the better course and why?
- a)Take the personal loan, since speed matters and no security is needed
- b)Take an education loan, which is purpose-tied and concessional, since the required admission offer is already in hand — a personal loan is dearest precisely because it needs no collateral
- c)Take a consumer durable loan, which covers education expenses
- d)Take a gold loan, since education loans require a guarantor
Show the answer
Answer: (b) Take an education loan, which is purpose-tied and concessional, since the required admission offer is already in hand — a personal loan is dearest precisely because it needs no collateral
The chapter names the right instrument: "Education loan is required for students and family to meet the financial goal of higher education", and the precondition is already satisfied — "students should have an ADMISSION OFFER from an institution BEFORE they apply." Chapter 9 adds the Vidyalakshmi portal, whose objective is "that no student leaves his or her education mid-way due to lack of funds", with a common application form for several banks and a link to the national scholarship portal. Against that, the personal loan's selling points are the reasons it costs more: "can be utilized for ANY PURPOSE... NO COLLATERAL SECURITY IS REQUIRED." A lender with nothing to seize and no purpose to verify prices that risk into the rate. Speed is a genuine convenience, but paying a materially higher rate for four years of fees to save a few weeks of paperwork is an expensive trade — and option (c) misdescribes the consumer durable loan, which is for "television, refrigerator" and similar goods.
3.A household has carried a ₹92,000 credit card balance for eight months, paying only the minimum, and holds ₹2,40,000 in savings. What does the chapter suggest?
- a)Continue paying the minimum, since the account remains in good standing
- b)Stop using the card, switch to a debit card, and clear the outstanding from savings — the interest saved is certain, while no investment return is
- c)Take a personal loan to repay the card, since personal loans are cheaper than all alternatives
- d)Ignore it, since credit card balances do not appear on a credit report
Show the answer
Answer: (b) Stop using the card, switch to a debit card, and clear the outstanding from savings — the interest saved is certain, while no investment return is
Three tips apply at once. "Tip 05: STOP ALL THE ACTIVITIES THAT RESULT IN DEBT." "Tip 06: USE A DEBIT CARD INSTEAD OF A CREDIT CARD. It ELIMINATES THE RISK OF SPENDING BEYOND YOUR MEANS." "Tip 04: NEVER TREAT CREDIT CARDS AS FREE MONEY." Chapter 4 explains why eight months of minimum payments is so costly: the card runs on "the lending bank's credit facility" and "if outstanding amount is not paid on time, interest is levied" — the minimum keeps the account in good standing while barely touching the principal, so the balance survives and interest accumulates on it. Clearing a revolving balance is the highest-certainty return available to a household. Option (d) is factually wrong: CIBIL collects records "pertaining to LOANS AND CREDIT CARDS", submitted monthly, so this behaviour is precisely what suppresses a score. Option (c) is a weaker version of a sound idea — replacing an expensive balance with a cheaper secured loan (say a gold loan) can help, but a personal loan is itself the dearest category, and here savings exist.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- 5 Cs in creditThe five factors — Capacity, Character, Capital, Collateral and Conditions — a bank weighs when deciding whether to sanction a loan.
- CIBILIndia's first credit information company, licensed by the RBI, which collects lenders' monthly payment records to produce individuals' credit scores and Credit Information Reports.
- CollateralA property or other asset a borrower pledges as security for a loan, which the lender can seize if repayments stop; the lender's claim to it is called a lien.
- Credit scoreThe number a credit information company builds from your loan and credit-card repayment history, and the first thing a lender looks at when your application arrives.
- Housing loanA loan for construction, renovation, extension or purchase of property, whose principal qualifies for a Section 80C deduction and whose interest qualifies for a Section 24 deduction on loans taken after 1 April 1999.
- Pradhan Mantri Mudra YojanaA government scheme offering business loans to small and medium enterprise proprietors, in three tiers — SHISHU, KISHOR and TARUN — sized by the loan amount.
- Revolving creditCredit card borrowing that arises when the bill is not paid in full by the due date and the balance is carried into following cycles — at 3% a month, a compounded 42.6% a year.