AVAILABILITY OF EASY CREDIT THROUGH PERSONAL LOANS
Availability of easy credit is making it possible to translate oneâ€™s dreams into reality. Opting for a personal loan is one such way.
DM got his daughter married off with great pomp and splendor. RD bought for his aging parents, a plasma television. A common thread running through all the above is that these people opted for a personal loan offered by banks in order to fulfill their desires.
Personal loans â€“ Characteristics
Two characteristics that differentiate a personal loan from other retail loans are:
1) Unsecured in nature
Personal loans are unsecured loans, which means these are sanctioned without any collateral, unlike a home loan or an auto loan where the underlying asset is mortgaged with the lender.
2) Sum borrowed can be utilized for any purpose.
There is no check on the end use of the sum borrowed. In other words, the lender does not question you about why you need the loan.
The right personal loan
Personal loans are not â€˜structured loansâ€™ i.e., the requirements for granting a personal loan and its accompanying features are not really standard across the industry. Hereâ€™s taking a look at a few facts that you can keep in mind when you are scouting for one:
Loan Amount & Loan term
Depending on your income level and repayment capacity, the maximum loan amount generally ranges from Rs 1 lakh to Rs 15 lakh. Depending on the lender, the loan term is generally between 12 to 48 months. In some cases, it can extend to 60 months.
Each lender will have its own requirements which you need to fulfil to avail of the loan. These could be over and above the age and income level criteria. For instance, in the case of Baroda Personal Loan (personal loan from Bank of Baroda) it is mandatory that you should have a banking relationship with any bank for at least six months before applying for a loan.
In order to ensure that your loan application does not get rejected, your application form should be generally supported with copies of your passport sized photographs, proof of your identity, proof of your residence, proof of your age and proof your income.
If you are an existing bank customer, you can do without all or a portion of the supporting documents. For instance, if you are an existing auto loan customer of HDFC Bank with a clear repayment of 12 months or more, then there is no need for you to provide any proof of income along with your loan application form for HDFC Bankâ€™s Personal Loan.
Cost of the loan
The cost of taking a loan includes the interest rate and also processing charges.
Interest rates: Being unsecured in nature, the interest rates on personal loans are generally higher than those charged on other loan types. Depending on the lender, the loan amount and the loan term, the interest rates generally range from 13 per cent to 22 per cent per annum.
Processing fees: Again this could change from lender to lender but in general, the processing fees range from 0.5 per cent to 2 per cent of the loan amount and are deducted upfront from the sum borrowed.
If you are an existing bank customer, then you are generally offered a discount on the interest rates as well as the processing fees. Additionally, if you are a senior citizen (i.e. if you have completed 60 years of age), then, you could be eligible for a discounted interest rate. For instance, BoI Star Personal Loan (personal loan from Bank of India), offers a loan of up to Rs 50,000 at 11.5 per cent per annum to senior citizens, instead of 13 per cent per annum applicable to others.
Repayment on the sum borrowed, takes place through Equated Monthly Installments (EMI). It comprises the principal repayment and interest payment. The EMI is calculated on the basis of the loan amount, interest rate and tenure of the loan. It comprises the interest on the outstanding balance as well as an amount of repayment of the capital (principal).
It is possible for you to structure the EMI to match your income flows. For instance, MyTerms Credit (personal loan from HSBC Bank) gives you the option of keeping a lower EMI in the first year of the loan term, and, subsequently raising it in the following years.
If you prepay your loan, you may be charged a pre-payment penalty. Depending on the lender, the pre-payment penalty can be as high as 4 per cent of the outstanding loan amount.
In some cases, you can undertake pre-payment only if a portion of the loan term has been completed. For instance, in the case of My Terms Credit, pre-payment is allowed only after 6 months from the date of disbursement of the loan.
In the case of SBI Saral Personal Loan (personal loan from SBI), if you undertake pre-payment within 6 months from the date of disbursement of the loan, you will be charged a pre-payment penalty of 1 per cent, else, there is no penalty levied.
A few banks can penalize you, if you fail to service the loan on time. This penalty would be over and above the check-bounce charges that would be levied.
Do not get swayed by the easy availability of personal loans. Assess your income flows, to ensure that you will be able to service and repay the loan on time. Also, spend some time scouting around for the best deal on offer.