What Is a Loan and How a Loan Works

What Is a Loan and How a Loan Works

A loan is money you borrow from a lender and repay with interest over a set period, called the tenure. Knowing how a loan works, from application to closure, helps you judge the cost before you sign.
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In summary

Understanding how a loan works starts with its 6 parts: principal, interest rate, tenure, equated monthly instalment (EMI), fees and, for some loans, collateral. A loan then moves through 6 stages, from application to closure. A Bajaj Finance Personal Loan is an unsecured term loan, so no asset is pledged.


  • The lender assesses your CIBIL report, income and existing EMIs.
  • The Key Fact Statement shows the full cost before you accept.
  • EMIs repay principal and interest together.
  • Anjali borrowed Rs. 1.5 lakh over 36 months.

Ready to see an offer? Check your loan offer with your phone number and a one-time password (OTP) → apply online → receive funds within 24 hours* of approval.

What are the parts of a loan?

Every loan has the same building blocks, whatever the lender. The table defines each one, so you can read an offer and see how a loan works in practice, line by line.


PartWhat it means
PrincipalThe amount you borrow
Interest rateThe yearly charge on the amount still owed, in % per annum
TenureThe repayment period, in months
Equated monthly instalment (EMI)The fixed monthly payment of principal and interest
FeesOne-time or event-based charges, such as processing or bounce charges
CollateralAn asset pledged as security; not needed for an unsecured loan

Last updated: 23rd October, 2026


Within how a loan works, a CIBIL score is a 3-digit number from 300 to 900 that summarises your repayment record. Lenders read it alongside your full credit report, which is central to how a loan works at the assessment stage.

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What are the stages of a loan?

A loan passes through 6 stages. The table shows how a loan works from the first step to the last.


StageWhat happensResult
1. ApplyYou share identity, income and bank detailsLender has what it needs to assess you
2. AssessmentLender checks your CIBIL report, income and existing EMIsAn offer, or a decline
3. Key Fact StatementYou read the rate, fees, EMI and total costYou accept or walk away
4. DisbursalMoney reaches your bank accountLoan is live
5. RepaymentEMIs are debited each monthBalance falls; record builds
6. ClosureLast EMI paid, or loan foreclosedNo-dues certificate

Last updated: 23rd October, 2026


Keep the no-dues certificate after closure. It proves the loan was repaid in full, the last step in how a loan works.

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What types of loans are there?

Loans are grouped by whether they need security and by how you draw the money. The table sets out the 4 main types.


TypeHow it worksExamples
SecuredBacked by an asset, such as a home, vehicle or goldHome loan, car loan, gold loan
UnsecuredNo asset pledged; based on your profilePersonal loan, credit card
TermA lump sum repaid on a fixed schedulePersonal loan, car loan
RevolvingA limit you can draw, repay and reuseCredit card

Last updated: 23rd October, 2026


Secured loans put an asset at risk if you do not repay. Unsecured loans rely on your income and record instead, but how a loan works is otherwise the same.


Worked example: Anjali in Coimbatore

Anjali is 29 and is a salaried quality analyst at a Coimbatore spinning unit. Her salary is Rs. 55,000 a month, and her CIBIL score is 729. Her Rs. 1.5 lakh loan for a rooftop solar system and inverter shows how a loan works in practice. At an illustrative 15% per annum, she compared the EMI at 24 and 36 months.


EMI = P × R × (1 + R)^N ÷ [(1 + R)^N − 1]. Here P = Rs. 1,50,000, R = 15 ÷ 1,200 and N = months.


TenureMonthly EMI (Rs.)Total interest (Rs.)EMI as share of salary (%)
24 months (2 years)7,27324,55213.2
36 months (3 years)5,20037,1939.5

Last updated: 23rd October, 2026


The third year lowers each payment by Rs. 2,073 and raises lifetime interest by Rs. 12,641. Her processing fee could reach Rs. 6,195. Anjali took 36 months, since the solar system lowers her electricity bill by part of the EMI. Seeing how a loan works in rupees made the choice clear.


What can delay approval: a CIBIL score below 650 or existing EMIs that take up a large share of your income. Names or addresses that do not match across documents, and more than one loan application in the same month, can also slow it down.


Now that you know how a loan works, need one? With a Bajaj Finance Personal Loan, you can borrow Rs. 40,000 to Rs. 75 lakh, subject to eligibility. Check your loan offer with your phone number and a one-time password (OTP) → apply online → receive funds within 24 hours* of approval.

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What does a lender ask of a borrower?

Knowing how a loan works helps you prepare. For a Bajaj Finance Personal Loan, you need to meet the criteria listed below:


CriterionRequirement
NationalityIndian
Age21 years to 80 years.
Employed withPublic, private, or multinational companies (MNCs).
CIBIL Score650 or higher.
Customer profileSelf-employed or Salaried

*You should be 80 years or younger, at the end of the loan tenure.

Last updated: 23rd October, 2026


Meeting these criteria does not guarantee approval, which depends on eligibility, verification and credit assessment. No collateral or guarantor is required.


You may need the following documents, subject to your profile and application:


Document categoryAccepted options
KYC proofAadhaar/ passport/ voter’s ID/ driving license/ Letter of National Population Register/ NREGA job card
Identity proofPAN card, Real-time image / photograph
Employment proofEmployee ID card, Letter of Allotment of Accommodation Issued by Employer
Income proofSalary slips — last 3 months, Bank account statements — last 3 months
OthersPension order, Utility bill, Phone bill, Piped gas bill, Property / Municipal tax receipt

Not every applicant needs every document. Confirm the final list of required personal loan documents during your application.

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What charges come with a personal loan?

Bajaj Finance interest rates and charges on a Personal Loan, subject to applicable terms and customer eligibility, are listed below:


ChargeAmount
Interest rate10% to 30.5% per annum, subject to applicable terms and customer eligibility
Processing feeUp to 4.13% of the loan amount, inclusive of applicable taxes
Bounce chargesRs. 700 to Rs. 1,200 per bounce
Penal chargeUp to 36% per annum on the overdue instalment
Part-prepayment (Term Loan)Up to 4.72% of the principal prepaid, inclusive of applicable taxes
Foreclosure (Term Loan)Up to 4.72% of the outstanding principal, inclusive of applicable taxes
Part-prepayment (Flexi Dropline and Flexi Hybrid Loans)No charge
Flexi facility chargeRs. 1,999 to Rs. 18,999, inclusive of applicable taxes
Annual maintenance (Flexi Dropline Loan)Up to 0.295% of the Dropline limit
Annual maintenance (Flexi Hybrid Loan)Up to 0.472% in the initial tenure; up to 0.295% in the subsequent tenure

Last updated: 23rd October, 2026

*Terms and conditions apply.


Charges are disclosed in the applicable product information and loan documents, so read your Key Fact Statement before you accept. Add the processing fee to the interest when you compare offers, and see the personal loan interest rates and charges page for details.

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When is a loan not the right answer?

A loan suits a clear need you cannot meet from savings, with an EMI you can carry. The table shows cases where another route makes more sense, given how a loan works.


SituationBetter routeTrade-off
You have enough savedPay from your savingsThinner safety cushion
Need can waitSave for itPurchase waits
Existing EMIs already strain your payRepay one current loan firstNeed waits

Last updated: 23rd October, 2026


Borrow when the need is real and the EMI fits. Otherwise, wait or save, whatever you know about how a loan works.

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How do you apply for a personal loan?

You apply for a Bajaj Finance Personal Loan online in five steps:

  1. Check loan eligibility: Enter the required loan amount and repayment period, then click "CHECK LOAN OFFER".
  2. Enter personal details: Enter personal, financial and employment details to receive a personalised offer.
  3. Loan offer: Review the offer details and adjust the amount or tenure to suit the applicant's needs.
  4. KYC verification: Complete KYC and verify bank details.
  5. Talk to loan specialist: The application is submitted and an executive contacts the applicant about the next steps.

The process may differ for new and existing customers, and some customers may need to provide additional documents. At the offer step, read the Key Fact Statement before you accept.

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Key offerings: 3 loan types

  • Flexi Hybrid Loan
  • Flexi Dropline Loan
  • Term Loan

  • Withdraw and prepay – no extra charges
    You can withdraw from your limit and prepay as many times as you want, without extra charges.

  • Instalment pattern
    You can pay interest-only EMIs for up to 36 months, after which, the EMI will consist of both, the principal and the interest. EMI is applicable only on the withdrawn amount.

  • Flexi facility charges
    Flexi facility charges applicable based on your loan amount.

  • Withdraw and prepay – no extra charges
    You can withdraw from your limit and prepay as many times as you want, without extra charges.

  • Instalment pattern
    Fixed EMIs that cover both the principal and interest on the loan amount you withdraw.

  • Flexi facility charges
    Flexi facility charges applicable based on your loan amount.

  • Amount disbursed in one go
    The entire loan amount is disbursed at the start.

  • Instalment pattern
    Fixed EMIs that cover both the principal and interest.

  • Flexi facility charges
    No Flexi facility charges.

Personal loan interest rate and applicable charges

Type of fee

Applicable charges

Rate of interest per annum

10% to 30.5% p.a.

Processing fees

Up to 4.13% of the loan amount (inclusive of applicable taxes).

Flexi Facility Charge

Term Loan – Not applicable

Flexi Loans –Up To Rs 1,999 To Up To Rs 18,999/- (Inclusive Of Applicable Taxes)

Will be deducted upfront from loan amount.

Bounce charges

Rs. 700 to Rs. 1,200/- per bounce

“Bounce charges” shall mean charges for (i) dishonor of any payment instrument; or (ii) non-payment of instalment (s) on their respective due dates due to dishonor of payment mandate or non-registration of the payment mandate or any other reason.

Part-prepayment charges

Full Pre-payment:

  • Term Loan: Up to 4.72% (Inclusive of applicable taxes) on the outstanding loan amount as on the date of full pre-payment

  • Flexi Term (Dropline) Loan: Up to 4.72% (Inclusive of applicable taxes) on the outstanding loan amount, as on the date of full prepayment.

  • Flexi Hybrid Term Loan: Up to 4.72% (Inclusive of applicable taxes) on the outstanding loan amount, as on the date of full prepayment.

Part Pre-payment

  • Up to 4.72% (Inclusive of applicable taxes) of the principal amount of Loan prepaid on the date of such part Pre-Payment.

  • Not Applicable for Flexi Term (Dropline) Loan and Flexi Hybrid Term Loan.

Penal charge

Delay in payment of instalment(s) shall attract Penal Charge at the rate of up to 36% per annum per instalment from the respective due date until the date of receipt of the full instalment(s) amount.

Stamp duty (as per respective state)

Payable as per state laws and deducted upfront from loan amount.

Annual maintenance charges

Term Loan: Not applicable

Flexi Term (Dropline) Loan:

Up to 0.295% (Inclusive of applicable taxes) of the Dropline limit (as per the repayment schedule) on the date of levy of such charges.


Flexi Hybrid Term Loan:

Up to 0.472% (Inclusive Of Applicable Taxes) Of The Dropline Limit During Initial Tenure. Up to 0.295% (Inclusive Of Applicable Taxes) Of Dropline Limit During Subsequent Tenure

Credit guarantee scheme feeUp to 1.18% p.a. (pro-rated daily till 31st March) (inclusive of all applicable taxes) of the loan amount
Credit guarantee scheme renewal feeUp to 1.18% p.a. (inclusive of all applicable taxes) on the outstanding loan amount as on April 01 of the subsequent Financial Year.
*Renewal Fee to be collected only for 3 subsequent financial years.
 
**If the Remaining Tenure is less than 12 months, the CG Fee in subsequent years shall be charged prorated.

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Frequently asked questions

Loan basics

Repaying

What is the difference between a secured and an unsecured loan?

A secured loan is backed by an asset, such as a home, vehicle or gold, which the lender can recover if you do not repay. An unsecured loan, such as a personal loan, needs no asset and is assessed on your income, CIBIL score and existing EMIs. Both follow the same stages of how a loan works.

An EMI is a fixed monthly payment that covers part of the principal and the interest due on the balance. Early EMIs carry more interest, because the balance is higher. Later ones carry more principal. The EMI stays the same each month unless you prepay or the terms change, which is how a loan works on a reducing balance.

A missed EMI attracts a bounce charge and a penal charge, as listed in your Key Fact Statement, and it can be reported to credit bureaus. Clear what is overdue at the earliest, and speak to the lender if another payment looks at risk. Timing the debit just after your salary lands helps prevent a repeat.

Yes. You can foreclose a Bajaj Finance Term Loan by paying the outstanding principal plus the foreclosure charge listed in the fees table. Part-prepayment lowers the balance without closing the loan, a part of how a loan works that saves interest. Collect a no-dues certificate after closure and check that your credit report shows the loan as closed.

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Disclaimer

Bajaj Finance Limited has the sole and absolute discretion, without assigning any reason to accept or reject any application. Terms and conditions apply*.
For customer support, call Personal Loan IVR: 7757 000 000