Personal Loans Shift From Emergency Products To Daily Credit Service: Paisabazaar Report

Personal loans in India are no longer restricted to emergencies and short-term financial troubles, revealed The Personal Loan Story, a consumer insights report published by Paisabazaar. According to the report, the use of personal loans in lifestyle spending, healthcare, weddings and business-related expenses is on the rise. As many as 2,889 borrowers in 23 cities were interviewed as part of the study.

Fundamentals Dominate Borrowing Process

Even as the applications for personal loans continue to expand, necessity remains the primary reason for borrowing. The report showed that 48 per cent of the respondents had borrowed personal loans to finance essential or emergency requirements. Household spending, emergency medical services and urgent house repairs were some of the common causes for borrowing with11 per cent of borrowers citing them as reasons for taking personal loans.

Healthcare-related expenses emerged as a key trigger in urban areas. In Tier 1 cities, 14 per cent of borrowers mentioned medical emergencies as their main cause for availing a loan, as opposed to 8 per cent in Tier 3 towns. The findings point to continued dependence on personal loans to bridge gaps created by rising medical costs and limited insurance coverage.

Borrowing patterns also varied by geography. In smaller towns, credit use was more closely linked to survival needs. Tier 3 borrowers were over twice as likely as Tier 1 borrowers to use personal loans for essential living expenses, according to Paisabazaar’s study.

Lifestyle, Aspirational Spending on the Increase

Need-based loans are being complemented by aspiration-driven loans. Around 36 per cent of the respondents claimed to have used personal loans for lifestyle or discretionary purposes. The purposes include travel, purchasing consumer durables, funding wellness activities, and general spending.

Weddings and large celebration events contributed 11 per cent to the use of personal loans. This was higher among salaried borrowers, at 12 per cent, and was most evident in Tier 1 cities, where 14 per cent of respondents borrowed for weddings, compared with 10 per cent in Tier 2 and 7 per cent in Tier 3.

The report highlighted that middle-class borrowers were actively using credit for their aspirations. People with annual incomes between Rs 7.5 lakh and Rs 10 lakh showed the highest incidence of borrowing for lifestyle upgrades, using personal loans to fund expenses that exceeded their monthly income but were not easily met through savings.

Business Use Cuts Across Employment Types

Personal loans are also playing a big role in business financing. Overall, 16 per cent of respondents indicated that they have borrowed to meet business-related needs. For the self-employed, the percentage was higher at 31 per cent, while 9 per cent of the employed took personal loans for side businesses or family businesses.

This indicates that the unsecured credit market is becoming a flexible source of funding for entrepreneurial purposes, especially where formal business loans may be difficult or time-consuming to access.

Speed Drives Lender Preference and Satisfaction

The most critical element that impacted the decision to borrow was speed. Approximately 57 per cent of the respondents mentioned that the highest motivator of choosing a lender was fast approval, which was then succeeded by simplified processes and fast disbursals.

Non-banking financial companies (NBFCs) comprised the largest number of preferred lenders, with 44 per cent of borrowers opting for NBFCs, particularly for amounts below Rs 2 lakh. Private sector banks stood second with 28 per cent, followed by public sector banks with 22 per cent.

Despite the boom in digital lending, offline lending still dominates. Only 32 per cent of the borrowers took personal loans completely online, while 68 per cent chose offline branches or sought offline help. Lack of trust in data protection, fear of cyber fraud, and reluctance to use online procedures were cited by respondents as the main reasons for not preferring online lending.

High Discipline in Repayment

Repayment behaviour was quite disciplined despite the increased borrowing. The report pointed out that 92 per cent of borrowers had never defaulted on an equated monthly instalment (EMI). Of the 8 per cent who said they had faced delays in repayment, the reasons for defaults were mostly temporary, such as sudden shortage of funds or auto-debit failures.

Premature loan closure was also not extensive. Around 9 per cent of borrowers claimed to have foreclosed their personal loan, and most of them had found the process smooth.

Awareness High, Understanding Limited

Although the knowledge of credit scores was high, the understanding of the subject was shallow. Only 7 per cent of borrowers demonstrated full or partial knowledge of the impact that their credit scores had on loan approval and interest structure. On the other hand, only 32 per cent frequently check their credit score.

The report found that this gap between awareness and understanding often results in uninformed borrowing behaviour, such as multiple loan applications and over-borrowing, which can negatively impact credit health.

Overall, the results indicate that personal loans are increasingly becoming a part of household finance, both for stability and aspiration, despite the existing discrepancies in credit literacy and access.