All You wanted to know about Personal Loans

 

There was a time when borrowing used to be considered as almost a sin. Whereas today, you name an incident a loan is available for you from not one but many resources. Whether you want to get married, go for a vacation, celebrate a festival – ‘Personal loan’: your loyal and honest companion will be with you 24*7! 

Personal loans are attractive:

It is very simple and easy to get this loan. This loan is unsecured loan, it means you do not have to give any guarantee to acquire this loan. As it requires very few documents to process the loan, documentation is simple. After you put in the request and fulfill the eligibility criteria, you are in receipt of the money within a week or two. 

You generally get 1-5 year’s time to repay the loan. You need not give anything (movable, immovable assets) as a security to process this loan.

If this is the case then why any financial institution will give away a loan like this? Why they will try to benefit their customers at the cost of their own risk? Alternatively, there is something in between the lines, which we need to pay attention to..., let us see.

Basics of Personal Loan:

First, let us know about the documents mandatory to apply for the personal loan. And these include

●      Pan card, passport or driving license as identity proof.

●      You can submit passport, ration card , electricity / telephone bill, Gas Bill, Bank statement as a residence proof.

●      If you are working then you need to give your salary slip, form 16 and 6-months’ bank statement. And for a person who is self-employed needs to submit his 2-3 years’ accounts statement/IT returns as proof of income.

Remember when you give such proofs to the organization while applying for the personal loan .You are actually giving them a blueprint of your wealth condition. So don’t be under the impression that bank is asking for no documents from you.

Coming to the Interest Rates:

As banks claims it to be, loan with no end-use restrictions and no-security. Interest rates charged upon Personal are extremely high. They can range between 16 to 30 % annually. More to that, interest rates differ from bank to bank and person to person.

For salaried person if interest rate is ‘X’ then for the same personal loan it can be ‘X+1 or 2%’ for self-employed person.  For government employee interest rates may go down further. So depending upon your repaying capacity and bank’s willingness to lend you can negotiate for the better rates. You can even offer your Equities, M.F. and insurance policies as security to bank which will increase your credibility and may decrease interest rates.

Other charges:

Interest, of course, is the most significant of the costs. But that doesn’t mean you should ignore the other charges. These would typically include:

●    A fee which is charged for complete procedure. This processing fee is non-refundable if your loan is approved and partially refundable if your loan is rejected. It can be between 0.5% to 3% of the loan amount.

●    If you prepay your loan then bank might lose out on interest money acquired on your personal loan .Hence penalty is charged on the prepayment of the loan .And this can be up to the 5% of your loan amount.

●    Not only that bank might charge you for the things like documentation, late fee, duplicate statement, service tax etc. 

A personal loan can be proved beneficial in certain conditions. How? Let us explore that too.

Examples of Right usage of Personal Loan:

●    Setting a debt which has higher interest rates: Say, you borrow Rs 1 lakh from a moneylender for your sister's wedding of which interest rate is 2.5% per month. So practically, you will pay Rs. 30,000 as interest to your lender while loan amount will be the same. In such a case, you can take a personal loan to repay the loan to moneylender. A loan of Rs 1 lakh for two years at 18% a year means an equated monthly installment of Rs 4,992. After two years, you would have not only paid off the entire loan, you would have paid only Rs 19,818 as interest, much less than the Rs 30,000 you would have paid the money lender as interest for one year.

●    Paying off a large credit card balance: A personal loan can also be used to pay off a substantial credit card balance that is being rolled over for months. Paying just the minimum amount on the card bill will not help you as the interest is charged over the total bill amount and is very high, usually 2.5-3% a month. It's better to divert the money to paying the EMI of a personal loan. You could save 16-30% depending on the rate of interest you are able to get on the loan.

So you can always opt for personal loan when you are in dire necessities mentioned above but with a caution that” Personal loan is injurious to your financial health”!!!!!!  

 

The author is Ramalingam K, CFP CM is the Chief Financial Planner at holisticinvestment.in, a leading Financial Planning and Wealth Management company.