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 Get the Best From A Personal Loan |
Neither a borrower nor a lender be, for a loan oft loses itself as well as a friend in the giving. -- Polonius, in Hamlet
Probably this was the reason that banks decided to come out with the personal loan. When buying a house, there is always a housing loan to fall back on. If it's a car, there is the auto loan and so on and so forth.
But what if you want a loan for a wedding or holiday? Instead of tapping the pockets of family or friends, might as well opt for a personal loan.
Why a personal loan?
Get the best from your personal loan
Demystifying EMI
What do you need to qualify for a personal loan?
How much loan can you expect?
Why a personal loan?
The popularity of this loan stems from the fact that you don't have to state the reason why you need the money. Neither do you have to produce any collateral as in the case of mortgaging your home.
TopGet the best from your personal loan
You can put your loan money to any use you deem fit, be it to finance a holiday, a wedding or even studies. The discretion is yours totally and you don't have to state the reason.
Interestingly, if you are in debt, you can utilize this loan to your advantage. There are two ways by which you can do so.
- Use it for refinancing debt.
- Consolidate the various debt sources into a single source
Assume you have revolving credit on your credit card at the rate of 2 per cent per month. This amounts to 24 per cent per annum. What's more, every single item that you purchase and every expenditure billed onto your card is subject to this rate of interest. So now you don't get any free credit. You are paying the bank to use their funds, which you eventually have to repay. You can opt for the personal loan and clear all your credit card outstandings. You will be paying less to service your loan and you can once again avail of interest-free credit.
You could be servicing a consumer durable loan, revolving credit on your card and probably even taken an overdraft on your bank deposit. Instead of servicing the debt at different rates of interest with different repayment tenures, it makes sense to consolidate it into one single source. You will find that you are in a position to manage your finances much better.
TopDemystifying EMI
The equated monthly installment is term used for the money that you will have to pay every month to the bank. Since you will be paying one installment every month, the 12 installments at the end of the year are referred to as equated annual installment (EAI).
Loan amounts and repayment tenure
When you and the bank decide on the loan amount and the repayment tenure, the EMI is fixed for this time frame. Though it is an unequal combination of principal repayment and interest cost, it remains constant all through. The EMI payments at the start of the loan are heavily tilted towards interest payments and principal repayments are towards the end of the loan tenure. Hence, you end up paying more since the principal gets repaid only at the end of the tenure.
Rate of interest and payment dates
The rate of interest will be calculated either on a monthly reducing basis or on an annual reducing basis. Monthly reducing basis means that principal amount you pay every month is deducted when calculating the interest rate for the following months. Annual reducing basis means that the total principal repaid by the end of the year is deducted when calculating the interest rate for the next year.
Calculations on loans are also done on a daily reducing balance. But this is mainly done on Credit Cards whereby whenever a payment is made the principal is immediately deducted. So if the payment is made on January 15, the interest rate adjustment takes effect from the very next day. In the case of monthly reducing balance, it takes place the next month and in the case of annual reducing basis, the next year.
The most expensive loan will be one that is calculated on a flat rate of interest, though its interest will appear the least. Don't get fooled. For example, if you take a loan of Rs. 85,000 to be repaid within two years, the bank may quote a flat rate of interest at 9 per cent. On an annual reducing basis, it would work out to 11.77 per cent and 16.41 per cent on a monthly reducing basis.
So when presented with a rate of interest, ask them the method of computation. The thumb rule: the more frequently computed the better.
TopWhat do you need to qualify for a personal loan?
Not much. For starters, there is no collateral needed. The crux here is to provide the right documentation.
You will need to produce the latest salary slip, proof of personal identity (passport, driving license, voter identity), income tax returns, six-month bank statement and credit card statement (if in possession of one).
What's more, the company you work for should be on the bank's approved list. Each bank has its own set of criteria. Some may consider applications only from listed companies. Others may look at private companies with a specific turnover. Multinationals are generally approved of. So before you even submit the documentation, you will be asked the name of the company. This will determine whether or not they are interested in you as a prospective customer.
TopHow much of a loan can you expect?
Citibank offers a loan for 11 times the monthly income salary. Repayment will depend on the amount of loan in some cases. It is fixed at three years for Citibank if the loan is up to Rs 1,00,000. For higher amounts it is four years.
| Amount (Rs.) | Rate of Interest (% Per Annum) | Calculation | Service Fee | Processing Fee | |
| Citibank | 25,000 - 6,00,000 | 20 - 24 | Monthly reducing | 2 % of amount sanctioned | Varies |
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