How to make the most of a personal loan

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As compared to the car, home, or gold loans, interest rates on personal loans are higher, because of the greater perceived risk when sanctioning them.

During a financial crisis or any medical emergency, we all look towards a personal loan, as during an emergency it is an appropriate choice to get funds without much hassle. An increasing number of people are now taking personal loans even for their purchases, especially the big-ticket ones. For instance, people also opt for a personal loan while buying a house or a car, for children’s higher education, among other things.

Simply put, a personal loan is an unsecured loan offered by bank and non-banking financial company (NBFC) that individuals opt for to meet their personal needs. Key criteria that are considered before approving for such a loan is the income level of the borrower, credit and employment history, along with repayment capacity. However, before opting for one the trick is to understand your actual financial needs and then choose without hampering your budget. Experts suggest one should not try to opt for more than they actually require. Keep in mind, in the end, you only have to pay it off.

With the Reserve Bank of India (RBI) reducing the risk weight on all categories of consumer loans to 100 per cent from 125 per cent, banks would be more willing to extend personal loans. According to a recent survey, of Home Credit India (a consumer finance firm) it stated that after consumer durable and two-wheeler loans, personal loans are the 3rd most popular category of loans. Experts say the most common mistake people make while opting for a personal loan is to differentiate between essential and lifestyle-based personal loan requirements. It is better to avoid taking a personal loan lifestyle-based requirements as the interest rates and other charges on personal loans are very high.

A personal loan is not secured against any asset, unlike a home or a car loan. Which means the borrower does not put up collateral to avail it as it is an unsecured loan. In case of a default, the lender cannot auction anything of the borrower. Hence, as compared to the car, home, or gold loans, interest rates on personal loans are higher, because of the greater perceived risk when sanctioning them. But defaulting on a personal loan, like any other loan, is not good as it would reflect on the borrower’s credit report and cause problems when they apply for credit cards or other loans in future.

Also, while choosing the tenure for your loan, try taking a longer tenure. Opting for a longer tenure loan, not only lowers the EMI but also enhance your overall interest burden. Generally, you can choose between 1-5 years or 12-60 months, other tenures may also be allowed by banks but vary on a case by case basis.

The availing of personal loan has also increased because nowadays banks willing to offer pre-approved personal loans, especially to their existing customers. Other than banks, Fintech companies also offer such pre-approved loans based on the borrower’s credit profile, income, and stability of employment. However, before taking such pre-approved loans compare the interest rates charged by various players. Currently, the State Bank of India (SBI) offers personal loan at an interest rate of 12.50 per cent, whereas ICICI and HDFC bank offers it at 11.25 per cent. Normally, experts suggest that the total of your EMIs should not exceed 40 to 45 per cent of your take-home salary.