Personal Loans Simplified - All that matters (Part 1)
Unsecured finance, which includes both credit card debt and personal loans amounted to INR 5,00,000 Crores at the end of FY18. This number is double of the FDI inflows (INR 3,00,000 Crores) into our country during the same fiscal year. A large chunk of unsecured finance goes towards financing consumption largely addressing home renovation, purchase of white goods, travel, marriage etc.
One could argue that the decade leading up to 2008 was when home loans and auto loans surged. However, from then on, it has been a decade of unfettered personal loans explosion. Digitization, easier access and customized products have increased the people availing of these loan facilities. Unsecured finance has witnessed a five-year CAGR of 20.74% compared to a CAGR of 12.5% experienced by home loans during the same period.
Primary reason for this growth is the ability of Banks & Institutions to offer Loans at a faster turnaround time and affordable rate of interest.
Personal Loans are at their life time lowest interest rates but are still one of the costliest loans in effective value terms. It is important that we realize all avenues of spare cash before applying for a personal loan. A 5-Year Personal Loan for INR 5 lacs will be costing you a value interest outflow of approx. INR 1.67 lacs in addition to the principal that is to be repaid. It is of utmost importance that Personal Loan proceeds are used for productive purposes. I will strongly recommend that purchase of luxury products, international holidays etc. are avoided through loans.
Points one needs to consider before signing the Blue line
Pricing – Most banks today offer attractive rates of interest on Personal Loans, however it is only prudent to do some research and select the bank with the best offer for you. Your salary account will most definitely offer you a pre-approved personal loan which will be fast and easy to avail but not necessarily the best in features & pricing. The fastest loan need not be the best fit for you.
Tenor of Loan – Keep the loan as short as you possibly can. Higher tenor of repayment means higher loan interest outflow and this can be a long drawn and costly affair. If you have a long tenor it is of utmost importance that you pre-pay a certain amount every year and this is covered in the next point. However the choice of tenor should also take into consideration the EMI that you can serve monthly considering other monthly expenses.
Partial Pre-Payment – With this feature you can prepay a certain portion of the principal outstanding of your loan every year thus reducing the interest outflow on the overall loan. As and when, you have extra funds with you, it is highly recommended to pay off small portions of these high cost loans. With regular part pre-payments one can close the loan much faster and also reduce the effective rate of interest on the loan.
Fore Closure Terms – You can foreclose the personal loan at any point of time. Most banks have a minimum lock in period of 12 months post which a personal loan can be foreclosed after paying some foreclosure charges. Many banks also offer NIL charges on foreclosure after a certain tenor of the loan, however this clause in my opinion is overrated and is not as important as partial prepayment while you choose a financier. Only around 1% of customers actually foreclose a loan after availing it.
Loan protect – Banks offer credit protect products along with unsecured loans and this is highly recommended so that the family of the borrower is protected against any eventualities. Some credit protect products cover the loan exposure in case of accidental death, critical illness etc. while some products also come with a feature of life cover in addition to the credit protect. It is extremely important that you read the terms and avail the same only basis your suitability.
Pre-approved loans – the game changer
One of the easiest and most preferred ways of availing a Personal loan is pre-approved loan through your existing banker. Pre-Approved loan is offered to the customer when his creditworthiness is assessed to be favorable by the lender. The customer has to broadly fulfill certain criteria to be eligible for a pre-approved loan–
- Stable income as reflected in bank account
- Possess a good repayment history on existing loans and cards
- A good bureau score
- Sound banking behavior
Written By: Sai Giridhar - Group President & National Head – Consumer Retail Lending and Mortgages, has been a thought leader & brand evangelist in YES BANK, building future ready digital transformational solutions for Lending & Mortgages business in India.