The unprecedented medical emergency caused by COVID-19 has starved economies of liquidity. India, too, is battling with deep financial constraints; the gross domestic product or the GDP shrunk 23.9% in the Q1FY21 ending June 30 as compared to 5.2% growth in Q1FY20, marking the sharpest quarterly contraction on record.
In India alone, 2.62 million cases of coronavirus have been recorded and more than 64,000 people have died. The slowing economy, due to unexpected lockdowns and ambiguity surrounding a vaccine to fight the deadly virus strain, has caused great panic among Indians and that has affected everyday trade and commerce.
Amid dampened business activity and a deep impact on people’s income as well as savings, personal loans have emerged as an easy way to meet credit requirements. Let’s understand what makes personal loans a good bet.
Why Are Personal Loans So Attractive
A personal loan is the money that you borrow for a personal activity. This activity could be paying off your medical expenses, expenses for college, buying new equipment or a gadget or to cater to any other personal consumption needs.
To get personal loans in India, you need to have two important things in place – documentation and a credit score. Among the advantages personal loans offer are these features:
Most Personal Loans Are Collateral-free
Personal loans are majority collateral-free and help you access lump sum money, which is repaid usually in monthly installments over a period of time.
The collateral-free nature makes personal loans the easiest to get compared to other consumer loans, which often are secured, and credit cards. India’s biggest private bank HDFC Bank claims to grant collateral-free personal loans to pre-approved HDFC Bank customers in as little as 10 seconds and to others in under four hours.
The financial institution or the lender giving the loan accesses the applicant’s cash flows and the stability of their income (business or professional) to ensure a secure repayment.
Non-banking financial institutions (NBFCs) and fintech companies in India are promising collateral-free loans to first-time borrowers with no prior track record to promote personal loans.
Aditya Birla Capital, one of India’s largest private diversified NBFCs, categorizes bad credit score, insufficient income, incomplete or incorrect documentation and applying with too many lenders as the main reasons for first-timers loan applicant’s request to be rejected instead of a previous record of loan repayment success.
Personal Loans Interest Rates Make Borrowing Affordable
For personal loans, the repayment is based on an interest rate decided in annual percentage terms at the beginning of the loan tenure.
Nadeem Pirzada, head of consumer risk at Capital Float, thinks personal loans are ideal during COVID-19 as the interest rates are affordable and the interest is calculated on a reducing balance basis, which reduces the actual interest payment made.
For first time borrowers, the interest rates might be higher when compared to tenured borrowers with high credit scores. However, taking a personal loan and paying regularly helps in building a healthy credit score which in turn helps reduce the interest rate on future loans (including getting lower interest rate offers on housing loans), he adds.
Personal Loans Offer Flexibility
A personal loan gives you the flexibility to use the cash without a specific use case. In most cases, no bank or banking institution asks you why you need to borrow.
Adheer Dhar, the head of personal loans at Clix Capital thinks personal loans may also be a great way of debt consolidation, i.e. use of fresh personal loan to repay the existing higher rate loans or a card outstanding.
When compared to other financial products which provide the same flexibility, example credit cards, the personal loan option is much cheaper, says Pirzada.
Personal Loans Are Easy of Access
India adopting a digital-first approach for national banking and the introduction of a one-point verifiable 12-digit identification number Aadhaar has made getting a personal loan much easier.
The Indian federal government’s digitization project IndiaStack enlists the eKYC, which allows businesses to perform the Know Your Customer (KYC) verification process digitally. This process uses biometrics or a unique code sent via mobile.
The eSign, which has an open API to facilitate an Aadhaar holder to digitally sign a document. It also uses the DigiLocker, a digital platform for issuance and verification of documents and certificates that eliminates the use of physical documents.
Digital payments associated with the loan are carried out via the Unified Payments Interface (UPI), which is touted as one of the safest in the world by the Indian government.
Factors to Consider While Taking a Personal Loan
While evaluating loan providers for the most suitable personal loan, a consumer needs to ideally keep eight considerations in mind.
An applicant must ensure they fit into the eligibility criteria of the loan provider. Personal loans being unsecured are often subject to stringent scrutiny. Customers must approach credit lenders who are most likeable to approve a loan to ensure their credit score remains unaffected.
Interest rates have become easily comparable in the digital age of banking. Before applying to a financial institution, consumers must take the onus of a robust check, preferably digitally, and compare the different interest rates offered by the financial entities of their choice.
Banking entities are likely to impose varying charges on pre-closure of a personal loan in case you decide to repay before the stipulated tenure of the loan. Before finalizing your loan, consumers must thoroughly check pre-closure penalties.
Certain finance companies do not have the provision of a pre-closure or have a minimum lock-in period for the loan interest to be paid. Some companies allow only a part of the loan to be pre-paid and hence these factors are also crucial when deciding on your loan.
The tenure of a loan becomes significant as a longer tenure makes the loan affordable by reducing the monthly payment, but it also adds an incremental interest cost.
Evaluating the maximum monthly instalment towards loan repayment based on your income and monthly expenses will provide an indicator to choose the most suitable tenure.
In some cases, loan companies providing a clubbed offering such as an insurance policy can influence your decision towards opting for a certain personal loan.
The possibilities of clubbed discounted offering must be explored before finalizing your loan.
Ease of Access
In today’s times of a medical crisis, it may be wise to choose a banking entity that provides a complete digital loan journey and does not require human contact or branch visits.
In other words, your bank or banking institution should be digital-savvy, preferably should be able to cater to your queries via their own website or their mobile app.
Simple and clear communication in the personal loan documents is important to ensure you are not signing up for any unexpected liabilities.
Consumers must seek clarifications on loan documents’ jargon, if any, and all that they don’t easily comprehend.
The time between you finalizing a personal loan and the timeline of the final disbursement becomes important keeping the interest liability in mind.
With almost every second financial institution in the country offering personal loans, it is worth considering the processing time to avoid paying any unnecessary interest amount.
The processing time gains more importance when the personal loan amount is significantly big.
Do’s and Don’ts For Availing Personal Loans
Personal loans may be easier to get and tougher to repay if you don’t factor some of the important do’s and don’ts.
Evaluate Why You Need The Loan
Clix Capital’s Dhar advises consumers to opt for a loan keeping the need and end-use in mind while also considering the time frame to determine the monthly instalment liability in one’s cash flows.
“One should not take personal loans for speculative purposes or for instinctive purchases, which could lead to stress in cash flows,” says Dhar.
Check Your Loan Spend
Madhusudan Ekambaram, the CEO of KreditBee, advises consumers to be clear of the spend utility for which they avail a loan.
“Lack of clarity can cause irresponsible spend of the loan, followed by skewed repayment behaviour,” says Ekambaram.
He suggests taking a loan only if you have the repayment capability. Putting too much
pressure on yourself might result in hassles later.
Maintain Clarity On Terms And Conditions
Capital Float’s Pirzada advises evaluating the eligibility criteria before applying for a loan.
Reading the loan agreement carefully and fully comprehending the terms and conditions is paramount in ensuring you meet the repayment structure and timelines properly.
He suggests taking into account all relevant and applicable charges – interest rate, late fees, processing fees etc and setting up eNach or standing instructions, for hassle-free and on-time monthly instalments payments.
eNach is short for Electronic National Automated Clearing House that helps financial institutions and government bodies to provide automated payment services.
Be Honest, It Goes A Long Way
Ekambaram stresses on consumers to strictly avoid providing incorrect information or make attempts to mislead the financial entity.
“Firstly, it’s unethical. Secondly, if caught, you might have to face unnecessary consequences,” says he.
He also advises against availing a loan for the utility of anyone other than yourself. If there is any repayment issue, you’ll be the one facing the brunt since the loan is registered against your name in the central bank-regulated financial institution.