Personal loans are primarily meant for expenses that a person may not have anticipated or cannot afford at one go. It lets them spread out the cost over a period of several months with amounts that they can pay easily. Personal loans can fulfil various purposes such as a marriage, starting a business, medical expenses not covered by insurance, etc. They give the borrower a lot of flexibility in terms of how they wish to use the money.
Personal loans are given an unsecured loan, so the risk factor for the lender is high. Therefore, the interest rate on personal loans is relatively high when compared with other loans.
There are many factors that decide whether an individual’s loan is approved or not. The most important considered is the individual’s credit score. The credit rating tells the bank the financial behaviour of an individual including details such as the borrower’s track record of making repayment. A bad score and a poor credit history usually mean that the individual is not going to get approved. Therefore, it is imperative for an applicant to make sure they have a good credit score. A good credit score is virtually a must if you are looking for a low interest rate.
The market for personal loan is quite competitive with many private banks offering lucrative deals and offers. Some of the major players are SBI, PNB, ICICI, HDFC, and Standard Chartered. These are all reputed banks that give personal loans at low interest rates. Therefore, it becomes a hassle when one has to choose a bank for a personal loan. The information provided here will help you decide which bank to choose.
|Bank||Interest Rates||Where to Apply?|
|State Bank of India||Starting from 11.95%||Apply Online|
|Punjab National Bank||11.55% to 14.55%||Apply Online|
|HDFC Bank||15.75% to 20%||Apply Online|
|ICICI Bank||11.59% to 16.65%||Apply Online|
|Standard Chartered Bank||11.25% to 14.49%||Apply Online|
State Bank of India
India’s premier government-owned bank is also the largest bank in the country with more than 14,000 branches all over India. SBI gives personal loans at an interest rate starting at 11.95% for a period of up to 5 years. The loan amount starts at Rs. 50 thousand and extends to Rs. 15 lakh. A processing fee of 1% is charged on the total loan amount.
Punjab National Bank
Punjab National Bank is another premier state-owned bank with almost 7000 branches across India. PNB offer personal loans at interest rates starting at 11.55% to 14.55%. The tenure of the loan can be up to 60 months which works out to an approximate starting EMI of around Rs. 2,250 per lakh. A processing fee of 1.80% plus service tax is charged during the approval process.
The Housing Development Finance Corporation Bank is the second-largest private bank in the country. The bank offers interest rates of 15.75% to 20% per annum on HDFC personal loans. The amount borrowed can be in the range of Rs. 50 thousand to Rs. 15 lakh. The tenure of the loan can be between 12 and 60 months. This means that the EMI starts at around Rs. 2400 per lakh for the maximum period of 5 years. A processing fee of 2.50% of the total loan amount is levied on the borrower.
India’s largest private bank offers some of the lowest interest rates in the market for personal loans. ICICI charges an interest of 11.59% to 16.65% with tenures from 1 year and up to 5 years. The amount borrowed can be between Rs. 50 thousand to Rs. 15 lakh. The EMI starts at around Rs. 2,200 per lakh for the maximum tenure. A processing fee of up to 2% is also levied on the total amount borrowed.
Standard Chartered Bank is one of the few international banks that are quite popular for their personal loans. The bank offers personal loans at interest rates starting at 11.25% to a maximum of 14.49%. The maximum amount that can be borrowed is Rs. 30 lakh. The maximum tenure of their personal loans is 5 years. A major advantage with Standard Chartered is that they charge no processing fee for personal loans.
There are some requirements which can only be filled with the help of money and there is no specific loan for the same. If you have a medical emergency in your family or you have to manage some requirements of your home, you have to depend on personal loans. The loan can sponsor a trip or some business requirement. It can also be taken when you have some extra money requirement to run your family for some time. Just few years back, personal loan was the only way out to finance your special requirements but today you can also depend on gold loan. There is always a dilemma when choosing between the two.
Which loan is better to take?
- For gold loan, you need to have gold of good quality and that would be able to finance your requirements. This is very important to apply for gold loan because this cannot be processed without a security. However, for personal loan any such security is not required. However, the gold loan interest rate is lower than the personal loan, so your monthly expenditure on the interest will also be lower for gold loan. You don’t want to pay extra on loan because this will not yield any benefit what so ever.
- Gold loan application does not have eligibility criteria. If you have gold, you can apply for the loan and your amount will be approved based on the value of the loan and not your eligibility. Yes, every bank has a limit to the amount they can approve the loan for and that is how the loan amount is processed and approved. For personal loan, your income criteria are also quite important and everyone is not eligible for such a loan.
- The requirement of documentation is quite less in case of gold loan. You have to submit the gold and declare that the gold belongs to you. You will also need to present your pan card and bank details so that the money can be transferred. Your address will be verified by the bank in order to approve the loan. In case of personal loan, you need more documents, like your bank statement and income proof. Everyone is not provided the loan because they may not meet the eligibility criteria.
- The gold loan is processed within the shortest possible time because there is no hassle of income verification. On the other hand, you have to apply for the personal loan and wait for the approval from the bank’s side. The gold loan is even processed within an hour if the gold is in proper condition. So, if your gold can be verified, the loan will be approved without much delay. In case of any urgent requirement, gold loan is the fastest and ultimate option to trust.
- When you have taken advance from the bank against the gold, you will have the urge to pay it back in time. You will not miss the EMI for any month and there will not be much penalty. In personal loan, there is no mortgage. So, it is possible to miss the EMI and it may pile up to make the condition even worse.
There are so many conditions where you will require money to finance some needs on a urgent basis. You may not be eligible for a personal loan depending on the credit score or the previous loans you have taken. In all those cases, you can apply for a gold loan with the gold asset in your home. This is also given to the housewives who don’t have a proper source of income. That is why it is better to take gold loan than personal loan.
Loans are an easy way to fulfill financial liabilities such as your child’s education, their marriage, your much-anticipated vacation and a lot more. However, the banks have segregated the concept of loaning into various types. There are personal loans that you can use to fulfill your personal requirements or monitory contingencies. Moving on to the next loan categories, there are car loans and a home loan that allow one to buy a car and a home respectively without worrying about the expense. Gold loan is yet another significant concept that allows you to get instant money in exchange for your precious gold.
If you are planning to get a loan to fulfill your personal liabilities but are perplexed about which loan scheme to choose, it is advised to choose either a gold loan or a personal Loan. Both can be used to fulfill urgent financial needs but there are certain pros and cons of both that you need to know before filling up the loan application.
What is a personal loan?
A personal loan is one of many types of loans that can be borrowed from banks. It can be used to pay the consolidated debt, house renovation or any other unexpected expenditure. Personal loans are more difficult to get and have strict eligible requirements. To get a personal loan, you must know that:-
- Personal loan is unsecured loans
- A personal loan has fixed loan amount. The better your credit score and higher your income, the more money you can borrow
- The personal loan usually has fixed interest rates based on your credit score. The better your credit score, the lesser interest rate you’ll have to pay and vice versa
- A personal loan may affect your credit score. Therefore paying personal loan EMIs on time is the best way to keep your credit score unaffected
What is Gold loan?
As you might understand from the name, Gold loan is given against the gold. Many private and national banks, as well as other lending firms, offer this loan at attractively low interest rates. Many people get this loan for short term requirements to meet the needs of their children’s education, business expansion, child’s marriage and other emergency expenditures. Popular options include HDFC, Manappuram, Muthoot and SBI Gold Loan. Some key features of Gold loan include:-
- The gold loan does not require any other collateral except Gold. This makes easier for self-employed and unemployed people to get this loan.
- The gold loan involves no/less paperwork. Just an ID proof along with address proof is enough to get this loan.
- The gold loan has lower rate of interest (generally 12-16% per annum). It is far lesser than a personal loan that charges 15-26% interest rate per annum.
- The borrower gets the option of only paying interest during the loan tenure and at the end of the loan tenure, you have the option of paying off the remaining loan amount due in a single shot.
- Gold loan processing time is much shorter than other borrowing options.
- In rural areas Agricultural loan against gold is also available for agriculturist at very low rate of interest (7%-8%). However one needs to provide a proof of agricultural document to get the loan.
Gold loan vs. personal loan: Which is better?
Ideally, Gold loan is better than the personal loan as it offers faster processing, minimal documentation, zero pre-payment fees, and no EMI option. So now if you have a good amount of gold hoarded in your locker and you have immediate requirement of cash for your personal needs, it is good to make use of the gold instead of choosing personal loan option on higher interest rates.
Personal loans may come as an easy option to fulfill immediate financial needs such as the wedding of a son/daughter, medical disbursals, etc., but paying the loan debt can become a niggling situation for the borrower, esp. if the amount is huge. If you also find it difficult to repay your loans, you must follow the listed below strategies to manage your debt situation without stressing your wallet.
- Pay costly loans first: Personal loans have higher interest rates, so it is good to pay off this first to reduce your interest burden going forward. Start by paying the maximum amount you can afford without jeopardizing the repayment of the other loans. Once you have cleared the most expensive loan debt, start paying the next big loan.
- Pay higher EMI’s with increased income: Instead of paying fixed EMI’s every month till retirement, it is good to pay higher EMI’s whenever there is extra income flowing in to close the personal loan debt as soon as possible. Do not splurge on the latest mobile phone or newest range of the car. Use the money to pay down your personal debt aggressively. Extra cash flows such as maturity incomes from life insurance policies and income tax refunds can be used to pay off these loans.
- Don’t forget to save: It is good to pay higher EMI’s on a regular basis even though your personal loan interest rate may be low. But don’t forget to save some amount for future as well even when you are dealing with ill fate such as unemployment, sudden hospitalization, increased medical expenses, etc.
- Use current investments to repay debt: If your personal loan interest rate has increased significantly, you can liquidate your current investments to make the payment. You can borrow money from your life insurance policy or pay off your personal loan debt using your PPF balance. The PPF allows the depositor to take a loan against the balance from the third financial year of investment, and the same can be repaid within three years. The maximum loan one can take from PPF is up to 25% of the balance at the end of the previous year.
- Cut down expense on dinners and movies: When it comes to paying off the loan debt on time, making little amendments in your life can work wonders in keeping your finances in check. While we have so far discussed different ways with which you can reduce your loan burden, you also need to make some changes in your lifestyle to save money and pay higher EMIs. By making lifestyle changes we mean cutting down expenses on movie shows, dinner dates, weekend getaways, excess shopping, etc. You can also avoid using a credit card and instead make purchases with cash. This will automatically help you save big and pay the loan without much hassle. This change in lifestyle is needed until the time all the loan debts are paid.
- Lower your spending limit: You can also talk to your credit card company representative to lower down you spending limit. You must also avoid taking new loans until the time you repay the previous loan. If possible, try to automatically debit your repayment dues to your bank account. In this way, the loan amount will be deducted automatically on the due date and you will not be left with extra money to spend unnecessarily. Remember, making late payment impacts your credit score negatively and you are required to pay a late fee as well which means more money disbursal from your end.
- Get advice from debt counseling centers: If all the aforementioned ways fail to work in your favor, approach a debt counseling center. These centers offer free advice and effective ways to help borrowers pay off the personal loan debt.
These are numerous ways to manage your personal loan interest burden. In addition to this, you can even liquidate your assets such as jewelry, property, etc. and pay the loan.
Most of us get a personal loan to meet the current financial crisis but later fail to pay off the loan debts on time. To avoid getting into this situation, it is wise to read the fine print carefully and look for low interest rate loan schemes before signing the dotted line. Although it is good to pay all the loan debts on time, but when it comes to personal loans, the sooner you pay, the better will be your financial health and the credit score. If you are one looking to pay off your debts in the shortest possible time period, in the subsequent sections we will discuss some tips that you can follow:
- Choose the best home loan deal: Someone rightly said that the process of clearing loan debt faster starts at the time you get a loan. Make sure you choose the personal loan wisely by comparing the options available to you. Remember that the rate of interest on personal loan schemes varies at least 2-6% between lenders. Therefore it is good if you compare interest rates online before finalizing any one personal loan scheme.
- Check for no payment penalty: Most banks charge a penalty if you pay higher EMI’s to pay your loan faster this penalty is irrespective of the personal loan interest rate on offer. They do this to make up for the revenue loss that will incur on interest income. Thus to avoid getting into this issue, it is wise to choose a bank that offers zero pre-payment penalties on personal loan EMI’s.
- Choose the shortest loan tenure: By using easy and flexible EMI calculator, you can determine the loan options with shortest loan tenure. EMI is all about the interest rate, loan amount and tenure. Once you have opted for the personal loan with low-interest rates, you can choose the shortest EMI tenure based on your paying capabilities.
- Streamline budget and keep a check on unnecessary expenses: Making a budget and streamlining expenses is the best way to pay off the loan debts earlier. It also allows you to spend wisely and allocate your funds as per your basic requirements. Also, it allows you to keep a track on where your income is spent and you can easily cut down on charges that seem inappropriate to you to pay the loan debts faster.
- Create an emergency fund: Always create emergency funds to make sure that you can pay the loan EMI’s even in adverse situations that demand unexpected money disbursals. Missing EMI’s will add to your loan interest. It will also impact your credit score and make your future loans more expensive to you.
- Repay high-interest loans first: Making a list of all outstanding loan and them paying the one with high-interest rate can benefit you at large. Once you have cleared the most costly debt, you can move forward to pay the less expensive one.
- Monetize Assets: You can even choose to pay your home loan by monetizing your assets whether it a house, car, your life insurance policies, bonds, shares, etc. You can use these as collateral to secure a low interest secured loan from a lender of your choice.
These are quite a few significant tips that you must consider to pay your personal loan debts on time. Also, you can try and get your outstanding personal loan converted to a secured loan using your vehicle or residential property as security. But remember, this can only be done if your house or vehicle is free from various sort of debts. However note that if you fail to pay this loan, you may end up losing your collaterals. So it is a must to determine your condition and your debt paying capability before keeping your valuable property/vehicle on stake.
Personal loan can be one of the options when a person gets strapped for funds, it can help in closing the budget gap or meeting an immediate financial requirement. Whether it’s for house renovation, covering medical and educational expenses or paying off existing debts, a personal loan can be considered an ideal solution. However, with myriad of loans present in the market and each of them claiming their competencies, how would you make sure that you do not end up in a huge loan liability? So before signing on the dotted line, here are some personal loan mistakes that should avoid.
Not knowing your affordability
Most people tend to overstretch their finances by borrowing beyond their affordability. This situation could lead to financial crisis and default on payments, which will ultimately affect the credit report of a borrower. So it’s better to apply for a loan only when you can afford the monthly loan EMIs and other expenses.
Not doing a market survey
Before deciding a lender, it always pays to do a market research of what other lenders are offering. Compare the interest rate, prepayment clauses and other charges offered by other banks and choose the one that is suitable for your needs.
People often forget that personal loan is not the only option they have. A borrower should always compare and analyse key features, rate of interest, loan tenures, terms and conditions of other loans such as gold loans, loans against property, top up loans etc. before going for a personal loan. You can use the online loan aggregator sites for comparing the loans and choosing the right one.
Not choosing a familiar lender
Approaching a familiar lender or banker might work in your favour because they would be already familiar with your credit worthiness. It would also enable easy disbursement and quick loan processing. And probably it would get easier for you to negotiate on the interest rates and other charges of the loan.
Choosing longer tenures with low EMIs
Longer tenures seem like an easier repayment option but as a matter of fact, shorter tenure with higher EMIs are more cost-effective as compared to longer tenures with lower EMIs because the total interest pay-outs are lower. But before deciding the tenure, repayment capability and monthly budget should be taken into consideration.
Neglecting the fine print
Do not forget to read your loan agreement thoroughly, know everything about the interest rates, processing fees and other hidden charges. Clear every query related to the prepayment clauses. Banks generally do not offer pre-payment facility in the first six months and charge pre-payment penalties. Ensure that all your doubts get clear before taking the final decision.
Taking multiple personal loans
Taking multiple loans will increase your loan liability and would affect your loan eligibility. As the lenders would check your credit report which will show them that you are already occupied with several loan EMIs and granting another loan to you would rather be a risk to them. Hence they’ll avoid sanctioning loan to you, and if they do it, then your loan will possess higher EMIs which would ultimately disturb your financial picture.
Not being aware of credit score
Being financially disciplined client really pays you well and it makes sure that you have a good credit score. A person with good credit report is considered a good client and therefore the chances of getting loan approval are higher in that case. Be aware of your past credit records.
Personal loan comes with a flexibility to use it for any kind of household or personal financial requirements. Having said this, a borrower must understand the fine line between necessary and lifestyle based requirements. Considering the high interest rates and other charges of a personal loan, it is advised that a person should opt for a loan only when there is an urgent requirement of funds that cannot be postponed. It’s better to look at other options too before taking a final decision.
Personal loans have a unique feature of coming into the picture first, when facing a financial crisis due to emergency of any kind or even a long planned and well – thought over expense. Personal loans are a helpful tool in case of medical urgency or even to redo your living room. No one from the lending institute would ever come back and ask you about the area of usage of the disbursed funds. The absence of any kind of collateral or a security also makes personal loans one of the highest selling asset products offering by any reputed bank or a financial institution.
Next step is to obviously choose from the various options available around us. Nowadays, the lending institutes try to aggressively sell the loans. Remember the last time your friends about receiving another call from a loan department and getting bothered! However, you need to research on seeking feedback about the lowest interest rates and low turn-around time for processing of loan application.
Once you have chosen about the loan amount and the institution where you will be borrowing from, you need to adhere to the eligibility criterion monitored by the borrowing institution. Among the other documentary requirements, one check is completed from the bank’s end – CIBIL score.
What is a CIBIL score?
CIBIL is the abbreviated notation for The Credit Information Bureau (India) Limited. CIBIL happens to be an agency which provides credit history and associated reports linked to any individual or even a commercial set ups. CIBIL agency possesses records and details of your loan of any kind or credit cards even. This being an independent agency, helps to provide the most sought after platform by banks and other Financial Institutes, the credit worthiness of a possible lender. It reflects the history of lending by an individual and the associated repayment history. Any EMI skip or settlement of a long standing overdue for any loan account or credit card by an individual gets captured in the CIBIL scores. Data available on CIBIL gets updated every month with the help of submission of information by various lending institutes.
Good CIBIL score
CIBIL scores typically range from 300 to 900 for a person having any kind of credit history, 300 being the lower end of the score range. In order to be considered eligible for a personal loan, lending institutions look for a safe CIBIL score between 750 and 900 of the borrower. One might question in this scenario, whether a person having no credit history of any kind stands a good chance to get his loan application processed? The response is – NO. The reason behind this is the lenders are no really sure whether you really possess an appetite for credit at all.
You might have a pertinent question post the above information. Why such a high CIBIL score requirement for seeking a personal loan? Simple explanation would be the boon of personal loans –i.e., not seeking collaterals, becomes the bane for the lender. Personal loans have been considered by all lending institutions being an unsecured asset type hence making them very risky. A high CIBIL score would direct the lending institutions to ascertain whether a lender possesses a habit of a disciplined repayment.
Nowadays, CIBIL allows any individual to check his/her credit scores online post submission of a small fee. A tentative lender can check his score directly in case he is unsure about the same. The latter situation is desirable in such a case, since a rejection of any kind of loan application can further bring down the credit scores. On the other hand, a good credit score of 750 and above can help you negotiate better terms with any lending banks/institutions.
In situation where your loan application has been rejected by any bank due to a bad credit score, it is prudent not to apply for a loan immediately at some other organisation. First and foremost, one should check the CIBIL report in details and work towards clearing dues or unattended loan/credit cards.
An individual has to practise to be careful and disciplined while managing loans and credit cards. This can serve a long way to achieving the financial goals in the long term.