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Module VII: How To Ensure That Your Loans Do Not Become A Burden

Session 21: 10 Things to Consider While Taking a Personal Loan

These days, it is quite common to receive at least one e-mail a day on an instant or pre-approved personal loan in the mailbox; isn't it? The marketing team at banks makes the offer quite attractive, even compelling ...and thanks to the creative team, the visuals spell emotions.

But should you simply fall for these offers?

Well, ideally it's best to avoid personal loans as much as possible. However, if you're hard-pressed, or there's an emergency, consider personal loan offers as the last resort. But here are a few things to keep in mind before availing personal loans...

1. Interest rate:

   

   Remember, all personal loans in India are categorised as unsecured. So, the interest rates are higher compared to other secured loans (i.e. home loans, car loans, etc.). The interest rates are in the range of 12%-25% p.a.

   The payment tenure of personal loans usually ranges from 1-5 years. So, say you opt for a personal loan of Rs 15 Lakh to be repaid in 5 years; the EMI at different rates would be as shown here...

   Loan amount (Rs)	Interest rate	Term of the loan (years)	EMI (Rs) (rounded off)	Total cash outflow (Rs)
   15,00,000	11.99%	5	33,359	20,01,540
   	13.00%		34,130	20,47,800
   	14.70%		35,449	21,26,940
   	15.50%		36,080	21,64,800

   (Note: The above table is for illustration purpose only)
   (Source: PersonalFN Research)

   So, as evident from the table, a higher interest rate is a burden on your wallet. Therefore, ideally compare loan offers and opt for a personal loan with the most competitive interest rate.

2. Repayment flexibility:

   In addition to the regular repayments on your personal loan, assess if you're allowed to make additional lump-sum repayments and if any additional charges levied if you do. This flexibility can help you repay the loan ahead of time. Avoid signing up with an institution that penalises early repayment.

3. Processing fees:

   Processing fees change from bank to bank. Some banks charge a fixed fee, while others as a percentage of the approved loan amount. Further, there are some banks which don't charge a processing fee at all. A higher processing fee impacts your total cash outflow.

4. Good customer service:

   

   Assess if the lender offers access to your personal loan details online? This will enable you to keep track of the loan, and perhaps allow you to be in better control of your finances, even enabling you to make additional repayments. Besides, evaluate if queries on your account would be answered efficiently. While lenders will have varying customer service standards, there are some basics of good service which are universal.

5. Tenure of the loan:

   Shorter the loan tenure, the better it is. The table here highlights the impact on total cash outflow under different loan tenures...

   Loan amount (Rs)	Interest rate	Term of the loan (years)	EMI (Rs) (rounded off)	Total cash outflow (Rs)
   15,00,000	15%	1	1,35,387	16,24,644
   		2	72,730	17,45,520
   		3	51,998	18,71,928
   		4	41,746	20,03,808
   		5	35,685	21,41,100

   (Note: The above table is for illustration purpose only)
   (Source: PersonalFN Research)

   Looking at the table, you may be tempted to choose a personal loan for a five-year term considering a smaller EMI.

   However, keep in mind you end up paying a higher interest cost with a longer term in play. Therefore, the total cash outflow would be higher as the term increases.

6. Salary:

   

   Your salary highlights the repaying capacity. Lenders request borrowers to furnish the latest salary slips for that reason. Thereafter, lenders evaluate whether the salary is considered adequate, based on the amount applied for, compare it with expenses, outstanding loans (if any), and even the city of residence, amongst a host of other facets.

7. The company you work at:

   Almost all Indian banks categorise employers based on size and popularity of the company. If your employer falls under the highest category, you may be eligible for a higher loan amount at a lower rate of interest and vice versa.

8. Job Term:

   

   Banks and other lenders may analyse the time period you have been working at the current job and even the number of years of work experience. A higher time span in your present job may work in your favour while procuring a loan. Please note that lenders may also visit your employer to verify your details.

9. Your current economic life cycle:

   

   A bank may be unhesitant in granting a loan, if you are settled and future prospects of earnings are bright; plus if you are residing in your current house for long.

10. Credit Score:

    A bank checks credit scores if you're not first-time borrower...and if you are, then, taking a high value personal loan in such a case may be a challenge.

Finally, here are a few vital...

• Ascertain the amount you want to borrow and calculate how much you can afford to make in repayments.

• Evaluate how long it will take to pay the loan off, and how frequently you want to set the repayment cycle (weekly, fortnightly or monthly.)

• Decide whether a fixed or variable rate of interest on the personal loan would suit you.

• Compare personal loans online, look for one with a lower interest rate and lower fees.

• Organise any documentation and paperwork that is required to support your application and have this ready.

• Be true to yourself and follow utmost discipline while managing your personal finances to avoid a situation of debt-overhang.

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