ou need money.
And you have just learnt one good lesson: to get money, you sometimes need some solid assets.
If you had a home, you could take a loan against your home.
If you had a number of stock market investments, you could get a loan against these securities.
If you had a home loan, you could have taken a top up against your loan.
But you have none of these.
And you need the money.
Trust the banker to come up with a product designed for you. That's right. The much talked about personal loan.
Here's a look at it.
~ What's great about a personal loan?
i. You need not offer a security.
ii. You need not offer a guarantor.
iii. You can use it for whatever you want.
The most striking feature of the personal loan is that your lender is not really bothered with what you need the money for.
And, it is a far more convenient option compared to borrowing money from inquisitive friends and painful relatives, albeit at a cost.
What they look at is your salary or earnings (if self-employed), and your capacity to service the loan based on that.
Don't get too eager. Lenders are pretty stringent on this turf.
Remember they are taking a complete call on you. So the entry barriers are considerably rigid.
For starters, most lenders will scrutinise the company you work for. If they suspect it is a fly-by-night operator, you may not get the money.
If you pass this first round, you have to meet the criteria of a minimum number of years of employment (at least five years). So if you just trooped out of your college and are planning to zip on the Yamaha, wait! No finance happening here.
Then comes the salary. Most players insist on a net (take home pay) salary of Rs 7,000 to Rs 8,000 just to qualify.
The self-employed must have a minimum annual taxable income of Rs 60,000.
In case you qualify in all the rounds and find the loan irresistible, take a look at the not-so-good aspects of this loan.
~ What's not great about a personal loan?
The interest rate. It is high.
The rates start at 16% and go upto 22%.
Here's why.
Normally, when a loan is given, there is some security expected from you, the borrower. So you end up pledging your home, car, securities or gold.
If you cannot pay back the loan, the lender can take any of the items you pledged. He is just protecting himself.
A personal loan is different. It is not secured. There is no underlying security involved. You also do not need a guarantor. Should you default, your lender will be legally expected to repay the loan.
So the lender is taking a big risk with you. To make up for this risk, he charges a higher interest.
All the lender has to go by is the fact that you earn a particular amount. Therefore, you should be in a position to repay the loan. So he is taking a risk based purely on your ability to repay the loan and a perception of your personal circumstances.
So you pay the price.
What to look out for
Today, almost all the lending institutions offer personal loans -- from HDFC Bank, ICICI Bank, HSBC, ABN Amro, Citibank, Kotak Mahindra Bank, Standard Chartered and State Bank of India.
But here is what you need to check:
~ Minimum and maximum loan amount
IDBI Bank offers it from Rs 50,000 to Rs 10 lakh (Rs 1 million). If you want it for less, try SBI (Rs 24,000) or HDFC Bank (Rs 25,000).
UTI Bank too offers it for as low as Rs 25,000, but stops at Rs 500,000 (for the salaried and professionals), and Rs 300,000 (for the self-employed).
ICICI Bank offers the widest range of Rs 20,000 to Rs 15 lakh (Rs 1.5 million).
If the bank is not willing to give you the amount you need, try clubbing your spouse's income along with yours to avail of a higher amount.
~ Interest rate
Look around. Compare rates. You may get a better deal at some places than at others.
But don't get fooled by the interest rate that is presented.
In some cases, it is calculated on a monthly reducing basis (the moment you pay your principal, the following month's interest rate is calculated on the reduced amount).
In some cases, it is calculated on an annual basis (the same is done every year).
Of course, the monthly reducing rate is a better option.
The best way to find out is to tell the bank the amount of loan you want, for how long and get an Equated Monthly Installment.
The lowest EMI is your best bet.
~ Types of interest rate
SBI offers a flexible interest rate.
Other players too may offer it.
But be very careful. If interest rates rise, you will pay dearly for this loan.
Currently, SBI offers an interest rate of 16% per annum. But should you take the flexible interest rate, you could end up paying as much as 23% per annum if rates in the economy rise.
~ Repayment tenure
Most banks offer the loan from one to four years.
Though some players like ICICI Bank go up to five years.
And some do not even have the 12-month minimum time.
IDBI Bank offers it for a maximum of four years for salaried individuals, but doctors and dentists can take it for five years. A proprietor, professional or business partner can only take it for three years.
~ Relationship
You do not need to have any account with the bank to take a loan. But do check for exceptions.
If you already have a relationship with the bank (account or another loan), ask if they have a preferred interest rate (which will be slightly lower than the normal one offered).
Also, some banks tie up with corporates to offer a preferential rate. Check to see whether you fit the bill.
And if you have a salary account with the bank, chances are higher that you will get a lower rate of interest.
~ Penalties
Repayment is done every month via EMIs. You are given a fixed amount every month and have to submit post-dated cheques to that effect.
If you are sure you get some money during the course of repayment to repay the loan, look for pre-payment penalties.
If you do want to hurry up with paying your loan, check how much of a fee you will have to dish out every time you pre-pay. For instance, if you pre-pay more than 75% of the principal outstanding in one year, UTI Bank imposes a 1% penalty.
ICICI Bank permits repaying the loan only after 180 days (around six months) at a penalty; no part prepayment is allowed. So either you pay back the entire amount or nothing. That's tough.
HDFC Bank too permits prepayment after six months with a 4% penalty.
~ Fees
Check for documentation, administration or processing fees. SBI charges a 1% processing fee with no other fees at all. ICICI Bank, 2%.
~ Switching
If you are servicing a loan at a high interest rate, most banks will be more than willing to take on the loan.
Say you have a loan with IDBI Bank and want to switch to HSBC.
If HSBC approves your application, they will pay the entire loan amount back to IDBI Bank along with the pre-payment fees (if any), and you repay the loan to HSBC.
Banks may be willing to give a preferential rate of interest if you do so.
On a closing note, personal loans are Nature's answer to life's little emergencies!
So be sensible and keep them as a last resort. It always make more sense to forgo certain luxuries than be seduced by debt!
Use it for financing life's necessities and not luxuries!
Illustration: Dominic Xavier
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