What is a Short-term Personal Loan, its types, and how it works

A short-term personal loan is a great way to manage a sudden, necessary expense.

It requires minimum documentation and, usually, there’s no need for a collateral as most of these loans are unsecured. The application-and-grant process is also quick and easy – generally completely online.

So, if you have a healthy credit score and a stable income through salary or self-employment, you can approach a financial institution, such as a bank or a non-banking financial corporation (NBFC), and apply for a short-term personal loan.

Simply on the basis of a sound credit profile, an applicant can avail of a loan ranging from Rs 25,000 (or a lower amount) to Rs 5 Lakh (or more). Some fintech companies even offer amounts as high as Rs 25 Lakh under their short-term personal loan schemes. E.g. Bajaj Fintech grants medical emergency loans up to Rs 25 Lakh. 

Depending upon your credit worthiness, the rate of interest charged on the loan could vary anywhere from 8% to 30%. The loan repayment tenure may range from 3-6 months to 1-2 years. For certain special loans (mentioned below) the repayment tenure could be as long as 6-7 years.

Let’s take a look at some of the popular short-term personal loan categories:

1. Home Renovation Loan

While a long-term home loan is great if you want to buy a new property, a short-term personal loan may be a good idea if you only require some renovations in your existing home. This also makes for a good investment because the market value of a renovated house goes up.

You can borrow anywhere from Rs 2 Lakh to Rs 30 Lakh. However, if you avail of a higher loan amount, it will not be granted under a short-term loan scheme. For higher amounts, banks and NBFCs can offer a long repayment tenure of 20 to 30 years.

2. Education Loan

There are, of course, secured education loans with repayment tenures up to 15 years, however, for specific education-related expenditures, you can also opt for short-term personal loans. These loan amounts can be used to meet any academic expense, such as hostel fee, tuition fee for a semester, purchasing course-related equipment and so on.

While small loans are available under this category, loan amounts as high as Rs 20 Lakh can also be granted and the repayment tenure can go up to 7 years.

3. Wedding Loan

Weddings can really plunge one’s savings. Also, unexpected and unplanned expenses can crop up. Under wedding-related short-term personal loans, a member of the groom’s family or the bride’s family can apply for amounts as small as a few thousands to as high as Rs 20-25 Lakh. Depending upon the amount borrowed, the repayment tenure can range from 3 months up to 6 years.

4. Travel Loan

The Millennials and Gen-Zers like to spend on travel. Unlike previous generations, which believed in saving enough before one decided to travel overseas, today’s youth like to be able to make quick decisions. Travel loans are a great solution for them – especially if they have a stable source of income and strong credit profile. Again, the applicant can choose to go for small amounts, such as Rs 25000-50000 or a loan of 10/20/30 Lakh. The upper limit of loan repayment tenure is usually around 6 years.

5. Medical Emergency Loan

While insurance is usually the ideal answer to meet medical emergencies, a loan, too, could be a life-saving solution. Whether you don’t have a medical insurance or you’ve exhausted the insured amount and need more financial assistance at a short notice, medical emergency loans can be of immense help. You can opt for a small loan or even for amounts as high as 20-25 Lakh. Again, for higher amounts, the repayment tenure could go up to more than 5 years.

6. Loan for Debt Consolidation

A short-term personal loan can also be availed to pay off multiple debts. Having multiple loans reflected in your credit profile is not good for your credit score. So, many people like to apply for a Debt Consolidation Loan, use it to settle their debts, and then pay off that single loan.

Another advantage is that certain loans, such as those offered by credit cards, come with a very high rate of interest. While an unsecured personal loan will also be granted at a higher interest rate when compared to a secured one, it would still accrue lower interest than a credit card loan. Debt consolidation loans can be taken up to Rs 25 Lakh.

7. Pension Loan

Some financial institutions offer pension loans for retired individuals. Pensioners can, sometimes, land into a tight spot when faced with sudden high expenditures – such as those due to medical requirements. In a case like this, they can apply for a pension loan. The loan amount could be up to 8 times their monthly pension and the repayment tenure can be extended to 5 or 6 years.

8. Small Personal Loans such as Festival Loan

Certain banks and NBFCs also offer small personal loans for miscellaneous expenses. One popular small personal loan is the Festival Loan. Festivals can, a lot of times, lead to extra unplanned expenses. When faced with such a situation, you could opt for a Festival Loan. Usually, the loan amount is up to Rs 50,000.

9. Consumer Durables / White Goods Loan

White goods like air-conditioners, televisions, refrigerators or washing machines are generally expensive. If you need to buy multiple such consumer durables, it may be advisable to apply for a Consumer Durables Loan. The loan amount can go up to several lakhs. In addition, some banks / NBFCs may offer insurance covers also to make their deals more customer-friendly.

10. Personal Computer / Mobile Phone Loan

This is similar to the Consumer Durables Loan. As technology gallops, we have a huge range of digital devices available – and in numerous price bands. If you wish to make a high-end purchase but don’t have enough saved to do so comfortably, then you could go for a short-term personal loan. Alternatively, you could also be given an EMI payment offer by the seller, which would also be in collaboration with a bank or NBFC.

11. Used Car Loan

A very specific kind of personal loan, the Used Car Loan can be availed if you wish to purchase a second-hand car. Some financial institutions will offer loans up to 100% of the car’s market value, others will provide the loan at attractive low interest rates – as low as 7.75% – and with a generous repayment tenure of 6 to 7 years.

12. Bridge Loan

This loan is taken for a specific purpose and has a short repayment window – normally no more than 12 months. The idea is that you have a short-term monetary need and the loan helps you meet it. However, the interest rates can be higher than other personal loans. Some banks may also insist on a collateral.

13. Top-Up Loan

Suppose you have already taken a loan but now require another. As mentioned earlier, multiple loans do not reflect well on one’s credit profile. In such a situation, you can take a top-up loan, instead. Your bank will adjust the repayments for both the loans under a single EMI plan.

Eligibility requirements to get a Short Term Loan

• You need to be an Indian citizen
• You need to have a regular source of income
• You should be between 21 to 67 years of age
• Your CIBIL score must be 750 or higher

How to apply for a short-term personal loan?

• Do your research – find out which banks / NBFCs offer the most attractive interest rates on the kind of personal loan that you require.
• Find out about the loan processing fee and any other charges that a bank or NBFC will levy on the type of personal loan you need.
• For quicker results, apply online.
• You will need to fill in your Aadhar Number.
• Provide details of the loan amount you need as well the repayment tenure.
• Upload the necessary documents, as requested by the bank.
• Await document verification, which should happen within 24 hours.
• You’re set to receive the funds in your account!

Note: Always go for RBI registered financial institutions / loan apps