There are times when you need to borrow credit: for a long-pending vacation, a child’s higher education, a marriage, buying a new car, medical contingencies, or to meet household expenses. Credit can be availed in several forms – via House Loans, Credit Cards, Car Loans, and Personal Loans. Each source of credit availed has a purpose – Home Loans for servicing a new house payment, for instance. However, over the past few years, Personal Loans have rapidly started gaining in popularity.
What is a Personal Loan?
A Personal Loan is an unsecured form of credit which can help you fund a big-ticket purchase or bail you out during an unforeseen financial emergency or a financial crunch. By giving you almost instantaneous access to an immediate flush of funds, Personal Loans can cater to a lot of situations you might find yourself in. From personal expenses such as clearing medical bills to an unexpected expense or even debt restructuring– Personal Loans can help meet an individual’s urgent and immediate personal or private expenses with ease.
Personal Loans can be either availed from a Bank or a Non-Banking Financial Company (NBFC) and are usually sanctioned based on key factors including income level, credit and employment history, repayment capacity, etc. The loan duration is usually between 12 to 60 months but on a case by case basis, shorter or longer tenures may be permitted. Personal Loans should always be availed to meet emergency situation. For, they come packed with high interest rates. Thus, before you decide to apply for a Personal Loan, it’s important to carefully compare Personal Loan Interest Rates and assess the benefits involved.
The Pros of a Personal Loan:
A Personal Loan can help you make a big purchase or fund that dream vacation. Since loans can be repaid in equated monthly instalments (EMIs), it hands the borrower a lot of convenience. EMIs allow you to convert your purchases and break it down into more manageable monthly payments.
Personal Loans can be used for consolidating high-interest Credit Card debts into a relatively lower-interest payment. The idea is that you can opt for a lower-rate Personal Loan to immediately clear off your higher-rate Credit Card debt.
Being an unsecured form of a loan, Personal Loans can be availed without any need for security or collateral. Moreover, the documentation required for availing a Personal Loan is minimum with lower processing times as well. In most cases, you will need to furnish an income proof (salary slips), address proof (passport/ Aadhaar card) and Identity proof documents (passport/Aadhaar card, copies of degree).
As it allows you to avail a big chunk of money in a short period, Personal Loans are perfect when you’re in need of emergency financing.
Importance of checking Personal Loan interest rates
Personal loans will always have a higher rate of interest attached to them being an unsecured loan. Moreover, if you’re late or miss making a payment, you will be liable to pay late payment fees, cheque bounce charges etc. Additionally, any late or missed payments can also damage your credit score and affect your ability to get credit at better rates in the future.
Depending on your credit score, you will be quoted an interest rate – mostly in the range of 10-18 percent. The processing fee is also dependent on your credit score. You should make it a point to check and compare the interest rates at different financial institutions before availing a loan. This is because the interest may also vary due to banks & other financial institutions competing with each other, and in such a scenario, you may stand to benefit from getting a loan at a lower rate.
Here is a quick checklist on interest rates and processing fees on Personal Loans by popular banks.
State Bank of India (SBI) Personal Loan is offered at a minimum of 10.90 percent for salaried employees along with a processing fee in the range of 2 percent to 3 percent.
Indian Bank Personal Loan also extends Personal Loan starting at interest rates of 10.65 percent with a processing rate of 0.508 percent on the loan amount with a min of Rs 508/- However you may require collateral for loan eligibility.
HDFC Bank Personal Loans are offered at an interest rate starting from 11.25 percent with a minimum processing fee of 0.99 percent which goes up to a maximum of 2.50 percent up to Rs10,000.
ICICI Bank’s Personal Loan is extended from a minimum of 11.25 percent for salaried employees and 13.50 percent for self-employed professionals with a processing fee starting from 0.99 percent and up to 2.25 percent.
Andhra Bank Personal Loan charges an interest rate of 11.55 percent along with a processing fee which ranges on a case by case basis.
Additional factors to consider
Other factors which need to be considered at the time of availing a Personal Loan are listed as below:
Repayment capacity– Before availing a loan, you should always ask yourself whether you will be able to meet the EMIs on time. While availing a Personal Loan can help ride the tide during turbulent times, you should also be cognizant enough to understand if you will have the capacity to pay off the loan on timely basis later on without putting undue pressure on your resources.
Processing fees, Pre-payment penalties & Other Charges– Most Personal Loans come with a processing fee. In any case, at the time of availing a Personal Loan, make sure to shop around for the best deals. Also, make sure to look at pre-payment penalties which are applicable in the case of early repayment. Try to negotiate with the bank or lookout for a lender offering the lowest foreclosure charges. While at it, also be wary of other charges which are inadvertently slipped in by the lender.
Avoid 0 percent EMI schemes– These schemes – although clammed down by the RBI – might sound lucrative on the surface but end up costing more than the actual interest itself. This is because these schemes come clubbed with high processing fee and file charges which makes up for the absence of interest.
Don’t opt for advance EMIs – Another scheme peddled by some institutions is Advance EMIs where the lender asks for 1-2 EMIs in advance at the time of availing the loan. It essentially means that while the bank has reduced the loan amount, they have charged interest on the full amount.
The Bottom Line
At the time of availing any form of credit– including a Personal Loan– it’s imperative that you understand the terms & conditions and thereon use the funds wisely. Similarly, you should always lookout for the best deals and offers on Personal Loans while avoiding getting swayed by offers which sound too good to be true. Never apply for a loan amount more than you’re eligible for as it may not only lead to rejection but also damage your credit score. Personal Loans can be very helpful when managed properly but avoid taking on more debt than you can possibly service or you could fall into a debt trap which would be difficult to come out of.