Kolkata: Over the past few years personal loans have been one of the fastest growing retail loans in India. The reasons are not far to seek: personal loans fuel consumption as well as they offer a quick solution to urgent requirements of money when one is in a crisis such as paying a substantial medical bill, pay for admission fees in a college or university or some other urgent requirements.
However, raising personal loans for consumption seems to be the biggest driver. Buying that dream mobile phone or a big-screen television set, or white goods such as AC, fridge or washing machines or even going on a dream holiday (even honey moon) are big compulsions to raise personal loans to satiate the buying urge. However, personal finance specialists often urge extreme caution when raising a personal loan. Let’s find out why.
Interest on personal loans charged by SBI, HDFC Bank
Personal loans are the most expensive of all retails loans. For example, let’s see the rate of interest charged by a few major banks in the country.
State Bank of India (SBI): 10.30%-15.30%
Punjab National Bank (PNB): Begins from 11.50%
HDFC Bank: 10.90%-24% (for salaried applicants)
ICICI Bank: 10.85%-16.65%
Please note that these are the “rack interest rates”. A “rack rate” — also referred to as published rate or retail rate — indicates the highest or standard rates before any discounts or special offers are applied. The interest rates an individual is charged depends on a few factors, the credit score of the individual being a key one.
Why should you avoid personal loans?
The interest rates of India’s top banks mentioned above makes it evident that interest rates are highest in personal loans. The reason is that personal loans is an unsecured loan and the lending institution has no security to fall back on if the borrower defaults on EMI payments. The loans are sanctioned in the good faith that the borrower is creditworthy and will repay the instalments according to schedule. Interest rates being high, one would end up paying a lot more interest during the repayment period to extinguish the loan.
A personal loan drains you off your income and raise the debt burden, squeezing your savings and making it difficult for managing finances. Another terrible impact can be on your credit score. If you fail to pay a single EMI, it will negatively impact your credit score. In that case, raising another loan, no matter what the urgency, will become very difficult. You will also find it difficult to obtain a credit card.
Options to explore
Financially prudent person will take the following steps to avoid a personal loan. These are:
Higher savings: Cut down on expenses to make higher savings.
Review expenses/budget: Reviewing your expenses to cut down budget is the first step.
Selling assets: If you have idle assets, you could sell them before taking a personal loan
Seeking help: If you have munificent friends/relatives who can accommodate you with a loan, it could make more sense than a personal loan.
In the retail loans universe in India, home loan, vehicle loan, education loan, gold loan and personal loan are the most popular. Personal loans are easily the most expensive of the lot. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
