The practice of borrowing money to deal with sudden financial expenses or help meet financial goals is not new. But with banks and other financial institutions beginning to focus on retail lending, several new options have emerged for the consumers of today. The need is to carefully weigh each and choose the most-suited instrument. Here are some of the most popular loan options that consumers have today:
1. Personal Loans: Personal loans have become the most popular source of funds to fulfill urgent monetary needs, since these are quickly disbursed and do not have any restriction on end usage of funds.
Interest rates on personal loans usually range between 10.65-24 per cent per annum. These are generally provided for tenures of 1-5 years and involve processing charges up to 3 per cent of loan's amount.
Also, most lenders allow prepayment of personal loans, but charges up to 5 per cent of the outstanding principal may be levied for such prepayments. Moreover, personal loans are one of the fastest loans to be processed, since they involve minimal documentation, especially when taken through online financial marketplaces.
2. Loan against credit card: Loans against credit cards are loans granted by various banks, up to a fixed percentage of customer’s credit card limit. Since these loans are granted mostly to consumers with good credit history, they are pre-approved and usually involve zero documentation. The disbursal of funds also typically happens within a couple of hours.
However, the interest rate charged on these loans may be approximately 1-2.5 per cent higher than that of personal loans, depending on both the customer’s credit profile as well as the type of credit card. The maximum loan amount would also depend upon the credit card’s limit.
Sometimes, though consumers may be granted a loan over and above their credit limit, if the bank is confident of the customer’s repayment capacity. This however depends majorly on fixed obligation to income ratio or FOIR of a consumer. FOIR is the percentage of the monthly income being used to pay credit card dues or loan’s EMIs. Generally, lenders prefer lending to consumers with FOIR up to 40-50 per cent.
3. Top up existing home loan: Existing home loan borrowers who have made timely repayments in the past are eligible to ask for a top-up from their existing lender. The top-up loan amount is offered over and above the customer’s current home loan. Funds obtained from this loan can be used for multiple purposes such as funding child’s education, home renovation, business expansion, wedding expenses or any other personal need. Although home loans are being offered at interest rates as low as 8.3 per cent p.a., the interest rate on top-up loans is usually a bit higher.
To repay their top-up along with the existing home loan, borrowers can opt for the top-up loan’s tenure equal to the outstanding tenure of their home loan.
Home loan top ups help borrowers in dealing with any form of financial crunch which one may face, with no preconditions or restrictions on fund’s end usage.
4. Gold loan: With interest rates going as low as 9.24 per cent and disbursals being done mostly within day, gold loans has always been a popular source of funds for most households; more so because investing in gold is a common practice in India. The loan amount would majorly depend upon the gold’s value.
This type of loan often comes to the rescue during urgent need of funds, especially for those who have been denied other loans such as personal loan or a top up loan. Since eligibility criterion like income, credit score etc. do not matter and there is minimum documentation and speedy disbursal, gold loans are a convenient funding option for those owning gold.
However, gold loans are generally granted for shorter tenures, with the maximum tenures being up to 3 years. Upon failure to timely repay the loan or any other form of default, the lender has the right to use your collateral (gold) to recover the outstanding dues.
5. Loan against securities: Another form of loan available to fulfill personal needs is loan against securities such as fixed deposits, mutual funds, listed bonds, provident funds, Demat shares, insurance policies etc. Funds obtained from this loan cannot be used for speculative purposes or for any market linked activity. Lenders provide a detailed list of approved securities against which borrowers can take this loan.
- By Naveen Kukreja – CEO & Co-founder, Paisabazaar.com...