Personal Loans are those which are granted for personal, family, or household use. Such loans are usually unsecured; though in some situations the bank may require a guarantor. If the loan is unsecured, it is made on the basis of the borrower's integrity and ability to Pay. Usually, these loans are used for debt consolidation, education expenses, to pay for vacations, medical bills, etc. and are repaid over a fixed term with regular payments of principal and interest.
Personal loans comprise around 17% of the retail loan market share. However, in recent times banks have tightened unsecured lending due to the current financial uncertainty and the increasing number of defaults in this category. Presently banks are focusing more on keeping defaults to a minimum. A personal loan for the credit worthy is really a boon in the time of sudden need. In this article we will discuss the points one needs to keep track of when choosing a personal loan.
A Personal Loan would vary according to certain factors such as;
- Amount borrowed
- Interest rate
- Type of interest (fixed or a variable)
- Repayment term
- The down payment or deposit needed
- Related fees or costs (administration fees, prepayment fees, etc.)
- The insurance that the lender would require
The personal loans are often borrowed to meet the unforeseen expenses of an individual or a family. But if you have the habit of using personal loans to meet unnecessary expenses you are at risk. Because the higher interest rate of interest on personal loans will put you in greater financial problems in future. If the expense can be postponed till you get the required amount on your own, then what is the need of borrowing a personal loan? Before taking the loan you yourself should ask certain questions. Such as;
- Do I really need a loan?
- Can I postpone my expenses?
- Can I manage without a personal loan?
- Is it for a needless expense that I could really avoid?
- Is it possible to secure the money by other means like borrowing from a relative, taking up a part time job, sale of an asset?
Major types of personal Loans
There are two important types of personal loans. They are explained in brief below.
- Secured Personal Loans
- Unsecured Personal Loans
Secured Personal Loans
These loans are provided by the banker on the pledge of collateral by the borrower to secure the loan. Usually such kind of loans is provided to purchase property, car, etc. If there is any default in repayment by the borrower, the banker will recover the money using the collateral security provided.
Unsecured Personal Loans
Unsecured loans are generally given to the borrower with no pledge of collateral or security. As the banker/lender faces a very high risk of losing his money on default on repayment by the borrower, the interest rate is quite high.
Interest Rates
Below given table will show you the interest rates of personal loans charged by some of the major banks.
Banks/ Category
|
Salaried Employer A
|
Salaried Employer B
|
Salaried Employer C
|
Self-Employed / Professionals
|
Self-Employed / Non-Professionals
|
|
ABN Amro
|
17.0 - 22.0
|
17.0 - 22.0
|
17.0 - 22.0
|
17.0 - 22.0
|
NA
|
|
Andhra Bank
|
16.0 - 16.25
|
16.0 - 16.25
|
16.0 - 16.25
|
16.0 - 16.25
|
NA
|
|
Axis Bank
|
15
|
18
|
22
|
15.0 - 18.0
|
23
|
|
Bank of India
|
12.25
|
12.25
|
12.25
|
12.25
|
NA
|
|
Canara Bank
|
15
|
15
|
15
|
15
|
NA
|
|
Citi Bank
|
15.0 - 16.5
|
16.5 - 18.0
|
20.0 - 22.0
|
14.5 - 19.0
|
19.0 - 24.0
|
|
Corporation Bank
|
14.5
|
14.5
|
14.5
|
12
|
NA
|
|
HDFC Bank
|
16.0 - 16.5
|
16.0 - 16.5
|
16.0 - 16.5
|
16.0 - 16.5
|
NA
|
|
ICICI Bank
|
12.0 - 16.0
|
16.0 - 18.0
|
20.0 - 22.0
|
14.0 - 19.0
|
19.0 - 24.0
|
|
Karnataka Bank
|
13.25 - 14.25
|
13.25 - 14.25
|
13.25 - 14.25
|
13.25 - 14.25
|
NA
|
|
SBI
|
16.5
|
16.5
|
16.5
|
16.5
|
NA
|
*As on 16-July-2009
Fifteen Tips to choose your personal loan
If you are thinking of borrowing money to buy a car, gold jewellery, debt consolidation, home repairs, medical bills or anything else for that matter, here are some hot tips to make the process much easier. There are many things that you have to understand before applying for a personal loan. If you borrow a personal loan without proper knowledge, it will cause you severe financial problems. Following tips will help you in finding and applying for a personal loan.
- Find out the cheapest loan offer
- Understand the processing fee, Prepayment penalty and other charges
- Be clear about EMI and Tenure
- Avoid unsecured loans if possible
- Consider smaller lenders also
- Don't make numerous applications
- Be honest in filling the applications
- Have the right information while applying
- Understand what interest rate applies
- Identify whether you qualify for a 'relationship discount'?
- Try bankers with whom you are a regular customer
- Don't rely completely on comparison rates
- Understand what is on offer
- Check your statements for errors
- Keep accurate records
1. Find out the cheapest loan offer
There are a number of banks those who are providing personal loans. Personal loans come with very high interest rates ranging from 13% to 24%. To find a cheaper one you have to shop around. Compare interest rates and get the complete picture by understanding the annualized interest rates for each offer. Annualized interest might differ from bank to bank. Once you understand the interest rate, part figure out the total amount of repayment you need to disburse with all the offers before opting for the loan of your choice.
2. Understand the processing fee, Prepayment penalty and other charges
Before borrowing a personal loan you need to keep in mind the processing fee and other fees and charges that will be levied when you apply for it. Ask frankly if there any penalty payments for prepayment of the loan at any point in time. More often borrowers tend to pay up their loans earlier than planned to be free of debt. But if there is any penalty on prepayment, it will cost you more. Therefore, it is very important to know if your personal loan offer allows part prepayments.
3. Be clear about EMI and Tenure
EMI and Tenure will differ from bank to bank. So before choosing one evaluates all loan offers. The first condition for loan offer selection is the total money outflow that the loan will cost. The second factor is the EMI (Equated Monthly Installment). A loan offer with a lower EMI and a longer tenure may seem attractive, however not all such loans prove to be cost effective in the long run. Therefore, first calculate the total loan cost and then try to opt for a higher EMI, which you can comfortably manage to enable shorter loan tenure. Always keep in mind, loans with lesser EMI and longer tenure might look attractive but it makes you to pay more.
4. Avoid unsecured loans if possible
Unsecured loans look attractive as it doesn’t need any collateral or security. But it charges more interest on the borrowings. So try to avoid using unsecured personal loans if you can put up some security for your borrowings. This will help you in getting a lower interest rate. A home equity loan, allowing you to borrow against the equity built up in your own home or an investment property, is the best option of all, and could get you money at up to 5 percent less than a personal loan.
5. Consider smaller lenders also
When shopping around for a personal loan, consider smaller banks like cooperative banks, credit unions and other smaller financial institutions which might be more approachable, and offer lower interest too.
6. Don't make numerous applications
Whenever you are applying for a loan, the bank will check your credit history with CIBIL (Credit Information Bureau India Limited). So it is better not to fill out applications at several financial institutions and have all of them checking into your credit history. This can make you lower your credit score.
7. Be honest in filling the applications
Before borrowing a personal loan make sure that your need is unavoidable. Be honest about why you want the loan. Your bank may be able to offer you a loan option that better suits your circumstances. There are an increasing assortment of personal credit these days, such as; car loans, commercial loans, leases, home equity loans, etc.
8. Have the right information when applying
Try to provide all the necessary information while applying for a personal loan. This will help you to make further proceeding easy. What you will be required to supply in any application will depend on whether the loan is for personal or business use.
Personal lease applications will require :
- Proof of current employment
- Income details or tax returns
Business lease financing requires more detailed information and may include your :
- Balance sheet
- Tax returns
- Cash flow projections
- Business plan
9. Know what interest rate applies
Before borrowing a loan, be very clear about the interest rate charged on it. Always be sure you know what interest rate applies. Lenders often ‘sell’ you their finance packages by quoting the monthly repayments only. This may cover a high interest rate.
10. Identify whether you qualify for a 'relationship discount'?
Relationship discounts are available from banks and credit unions for those borrowers who have a long term relation with the bank and a range of banking business with that institution. Home and personal loan interest rate discounts, term deposit bonuses, savings account fee waivers and credit card annual fee waivers are commonly offered. Good and long term relationship with loan provider will help you in getting the interest rate deduced.
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