Make The Most Of Personal Loan

Personal loans are often taken for financing short-term needs or unforeseen expense. It is popular among borrowers as you need not state any reason to the bank. To top it all, you need not offer a collateral or have guarantors. All you have to do is submit a salary slip, proof of personal identity, residence proof and sign on a form. And the money is yours.

WHAT MORE CAN YOU ASK FOR?

But there is more to the story. Personal loans, though easy, come at a high interest rate. So it is pertinent for you to know if you are the right candidate and have the right reason to go in for such a loan.

ARE YOU THE RIGHT CANDIDATE?

Renters: If you do not own a home, a personal loan may be the only option available for you. You also have the option of credit cards, but the annual interest rate works out to 35.4%, against a personal loan, which charges interest rate in the range of 18-25%.

Home equity utilised: If you have already used a lot of your home equity and still need a small loan, a personal loan can be a good choice.

Small loan amount: If you need a few thousand rupees, which you can pay off in a year, then a personal loan is a better option compared to using home equity or credit cards.

However, there is a catch here. Most banks do not let you repay the loan before 180 days. So, even if you end up getting some extra money to repay your debt, you are still stuck with the loan and the high interest rate.

WHEN TO TAKE A PERSONAL LOAN?

For buying a consumer durable: You can opt for a personal loan to buy the latest LCD television or that cool music system. You may think of going in for a consumer durable loan, but the interest rate on personal loan is much lower than that on consumer durable loans.

A consumer durable loan comes at an interest rate in the range of 25-30%. In addition, the flexibility of duration and availability of various schemes make personal loans an attractive option.

Go for personal loan than your credit card: Opting for a personal loan may be a better choice than borrowing on your credit card if you want to keep your credit limit available for impulse purchases or an actual emergency requiring instant purchasing power. Often, borrowing money on your credit card carries a higher rate of interest than a personal loan.

To repay your credit card debt:
Assume you have revolving credit on your credit card at the rate of 2.95% per month. This amounts to 35.4% per annum.

Every time you swipe your card to make a purchase, your card is subject to this rate of interest. Eventually, you have to pay off your debt at an exorbitant rate. Instead, opt for a personal loan and clear all your credit card outstandings. That will weigh less on your wallet.

To service multiple loans: You could be servicing a consumer durable loan, revolving credit on your card and probably have even taken an overdraft on your bank deposit. Instead of servicing the debt at different rates of interest with different repayment tenures, you can consolidate it into one single source.

It will help you manage your finances better. But you have to check if the interest outgo will be much higher than servicing multiple loans. To determine this, calculate how much money you will need to repay all your loans. Check with the bank and ask them how much the equated monthly instalments (EMIs) will be on such a loan, along with the repayment tenure. If the EMI will be much higher than all your existing loans taken together, then avoid a personal loan, despite the convenience.

WHAT YOU NEED TO KNOW?

Qualifying criteria are usually stricter as there is no collateral. Most banks have eligibility criteria such as age limit, minimum educational qualification, number of years in the current company/residence and minimum net/gross annual income. Most banks maintain an approved list of companies. You will automatically get a loan if you are an employee of one of those companies. It also helps you to negotiate a better rate.

Personal loans are generally offered up to Rs 10 lakh, starting from Rs 20,000. Look out for closure charges, service charges and any other ‘hidden’ charges. Personal loans are expensive with higher interest charges than most other loans, except consumer durable loans.

You also need to verify if the interest component is being calculated on a monthly, weekly or a daily reducing balance method or on a lower period. Higher the frequency, lower is the interest rate charged.

FINANCING MADE EASY

Personal loan is popular as you need not state any reason to the bank

Opting for a personal loan may be a better choice than borrowing on your credit card, which comes at a higher interest rate than a personal loan

Instead of paying off your debt at an exorbitant rate, opt for a personal loan and clear all your credit card outstandings. It will weigh less on your wallet

Personal loans are generally offered up to Rs 10 lakh, starting from Rs 20,000. Look out for closure charges, service charges and any other ‘hidden’ charges