Personal loans are one of the most important engines of the consumption train in India. Therefore, its significance in the economy can’t be overemphasised. The phenomenal rise of personal loans in the country has certainly fuelled consumption leading to growth in certain sectors. But for the consumer personal loans could be a double-edged sword.
Therefore, it is crucial to know who should take personal loans and the Dos and Don’ts associated with such credit.
Relentless pursuit by lenders
Banks and NBFCs regularly chase customers with attractive offers on these loans, bombarding them with text messages and phone calls. Therefore, it is all the more important for an individual to know how he should conduct himself/herself when approached with loan offers.
The first thing to remember about personal loans is that it is very easy to fall into a trap. Usually, one is eligible for a maximum of twice one’s annual salary. But one should be extremely cautious and never make impulsive decisions.
Taking personal loans for shopping or vacations is one of the reasons that are advised against by personal finance strategists.
Interest rates could bleed you
Personal loans are unsecured loans, which means they are not taken after pledging any asset as collateral. Therefore, interest rates on personal loans are the highest.
For example, the range of annual rate of interest applicable to these loans is 10.75%-24% in HDFC Bank, 10.8%-16.15% in ICICI Bank, 10.99%-22% in Axis Bank, 11.15%-14.30% in SBI and 11.1%-18.15% in Bank of Baroda.
These rates are far higher than home loans or auto loans and these underscore the need for extreme caution when taking a personal loan.
Compare interest rates
Therefore, one must compare interest rates between lenders before finalising one.
Also, one must try to pay back the loan as soon as possible. So, while deciding on tenure, keep this in mind and don’t simply go for a longer tenure to just have it easy on the pocket. The longer the payback period, the more interest one has to cough up.
Some finance experts say paying off a personal loan within a year is an excellent idea.
As small as possible
Be very clear as to why you are borrowing money. Usually, personal loans should be taken as a last resort, since they are so expensive. Taking more loans than necessary will pile on more debt on you.
Another point that all experts advise is that one must not take on more money than one needs.
“The amount of personal loan should as small as possible. It should also be a matter of last recourse,” said investment strategist Nilanjan Dey, director of Wishlist Capital.
Never for speculative purposes
Instances are not uncommon where individuals are known to take personal loans for investing in speculative activities in the hope of making windfall profits. It can simply ruin one’s financial health and get one into a debt trap.
Usually, lenders grant a maximum loan amount that ranges between 10 and 24 times the monthly salary of an individual. For an average individual, taking a personal loan that exceeds the annual salary of an individual can build stress on one’s finances.
Never fail on EMIs
If you end up taking a personal loan, never fail to pay your EMIs. Failure to pay instalments on time will adversely impact your credit score, which, in turn, will affect your chances of getting future loans at a comparatively favourable rate of interest.
If the applicant is a salaried individual, lenders usually insist on salary slips in the past three months. If he/she is self-employed, expenditures on debit and/or credit cards for six to 12 months are considered.
Maintain good credit behaviour
Last but not the least, the applicant’s credit score is very significant in determining the quantum of the loan and the rate of interest to be charged.
A good credit history is an asset for any individual since it allows him/her to fall back on lenders in time of exigencies.
RBI’s concern
The in the economy quick build-up of personal loans has rattled the Reserve Bank of India so much so that in November last year it raised the risk weightage on these loans by 25 basis points in a desperate effort to rein in their growth.
“Little more than a half of the borrowers in this (consumer credit) segment have three live loans at the time of origination and more than one-third of the borrowers have availed more than three loans in the last six months,” said a RBI report.
Banks and NBFCs are bombarding individuals with text messages and phone calls to sell personal loans. What can consumers do in the face of such marketing onslaught? Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
