With the streamlining and formalizing of the banking and non-banking financial sector of India, getting Personal Loan for your various needs has become a lot easier. You can get loans for building or buying your dream home; buying that car you always wanted, paying for an amazing holiday getaway with your entire family and friends, medical bills and a million other varied purposes.
Usually, you get these loans for some specified purpose that you apply to the bank for, but, what do you do when you need a loan for a sensitive issue or your personal usage? You apply for a Personal Loan, of course. There are many Banks and Non-Banking Financial Corporations that provide Personal Loans to you.
What exactly is a Personal Loan?
An unsecured loan, Personal Loans, is basically provided by the lender to you for meeting your personal expenses. Since it is a type of unsecured loan, you do not need to pledge any collateral or security with the lender.
What are the uses and advantages of a Personal Loan?
A Personal Loan is useful for anyone who has a sudden need for funds. There are various reasons you might require funds for, some of these requirements can be fulfilled by the various types of loans that lenders provide, but for some things, banks do not provide loans. For all these reasons, you can apply for a Personal Loan: reasons like wedding expenses, personal use, business purposes and almost everything that requires money.
The advantages of Personal Loans
- Unsecured: Being unsecured loans, you do not have to worry about pledging security or collateral with the lender.
- No usage restrictions: You need not to worry about spending the money borrowed on only one particular thing; the borrowed amount can be spent anywhere without any restrictions from the lender.
- Processing time: Generally, these loans take lesser processing time as there is no security involved.
- The rate of Interest: Personal Loans carry a fixed rate of interest. You can estimate how much the repayment of the loan will truly cost you.
- Tax Benefits: If you prove that your loan was used only for house renovation, you can get Income Tax deductions of up to Rs. 200000 under Section 24B of the Income Tax Act, 1961.
Do nationalized banks provide Personal Loan?
Almost all nationalized and private banks provide a Personal Loan. With the recent push on digitization, you can get a Personal Loan very easily, from the comfort of your home. State Bank of India, India’s largest public sector bank, allows you to apply for an SBIPersonal Loan on their website. Other banks too have started providing this facility.
Can I apply for a Personal Loan for all financial needs?
This is not advisable at all. Borrowers should be aware of the various vulnerabilities that a Personal Loan may possess to you and your finances. Typically, Personal Loans carry a 10%-20% rate of interest. This varies and depends on your credit score and other details. There is also a Personal Loan processing amount ranging from 2%-5% of the borrowed amount. Apart from this, some banks also charge a prepayment fee, late payment penalty and other charges you, as a borrower, should be aware of. Personal Loans often hide traps within them.
What are Personal Loan traps?
These traps are hidden details and aspects of the loan that are not disclosed at the beginning phase; when the borrower applies for a loan. Personal Loan traps manage to entrap the borrower because of their ignorance and can make repayment very difficult. Let us discuss some of the traps and how to deal with them-
- Processing fees: Processing fees is a charge involved with all loans. What makes it a trap is when you have to pay more processing fees than you are entitled to. Typically, Personal Loans have a processing fee ranging from 2%-5%. It is up to you to make sure that you check out for yourself which lender is willing to provide you with the required amount of money with the least rate of processing fees. Overpaying by even 0.5%-1% is a loss to you and a burden on your finances. Proper research about the various lenders available in the market and, always insisting on full details and complete clarification regarding processing fees will help you avoid getting trapped.
- Loan insurance: Although a good financial tool, it may not always be your need or suit your financial situation. Often, banks insist on you buying loan insurance while you are applying for a Personal Loan, or claim that they do not forward Personal Loans without loan insurance. This is usually a tactic by banks to safeguard their interests and complete sales quotas. Currently, it is not mandatory to buy loan insurance with your Personal Loan, and no financial institution can enforce this on you. To avoid this trap, educate yourself with RBI guidelines and banking regulations before applying for a loan.
- High-interest rate and precomputed interest: Obviously, the most common trap would be a higher rate of interest than you could or should pay. As with processing fees, the borrower should make sure that they choose the interest rate that is lowest. Proper research is always a good choice when applying for Personal Loans. Another important thing you need to look out for is how the interest is calculated. Simple Interest method is beneficial for you, while precomputed may make you pay more. In essence, if you repay your loan earlier than the decided tenure, precomputed interest makes you pay more as higher interest is charged on previous installments.
- Prepayment fees: You might come into a situation where you can pay back the loan sum before the completion of loan tenure, however, some banks charge you a prepayment fee on this. This fee, essentially, burdens you with a payment higher than what you would have paid in the case on normal loan tenure end. Always insist on full knowledge and information regarding all kinds of fees that the lender may levy, this will help you avoid getting into this trap.
As a consumer, it is always advisable to do extensive details before applying for any loans and keep in mind the above-mentioned possible tricks to avoid getting into any loan mishaps in the future.