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S. Muralidhar

THE retail credit scene has changed dramatically, snowed under a mind-boggling array of consumer and personal loans offered by banks, finance companies and credit-card companies.

Flush with funds and faced with increasing competition from the private sector and multinationals, banks and finance companies are vying with one another to offer the best, cheapest and most convenient financing option.

Personal loans are one of the most preferred options for financing an unforeseen expense or for bridging any short-term need for funds.

So, if you are wondering how to fund a wedding in the family, the renovation of your house, a medical college admission, buying a personal computer or a vehicle, or want to make expensive debt cheaper, head straight for a personal loan.

High on flexibility

Personal loans are completely flexible, and are available for purchase of assets and consumer durables, home improvement, making tax-saving investments, higher education, holiday and travel, medical emergency medical or any other declared legal use.

Best, you can take the loan without offering any security.

Personal loans are usually short-term and given on the basis of your personal net worth as a salaried employee.

Therefore, in most cases, to obtain the personal loan, there is no need to provide any guarantors, security or collateral. Repayment periods range from 12-48 months and loan amounts sanctioned are closely linked to the salary or income earned.

Eligibility criteria

Most banks lend Rs 20,000-Rs 5 lakh depending on your income and repayment capacity. Some banks and institutions also allow you to club the income of your spouse if you wish to increase your loan amount. The total household income also affects the loan size, which can go up to Rs 10 lakh.

The total loan eligibility — though varying on the institution and tenure — is mainly a function of your take-home salary or profits (the loan amount may vary between one and eleven months' salary or profits, depending on the tenure). The other eligibility criterion is that the applicant should be in the 21-58 years age group. For self-employed professionals and businessmen, the eligible age group is 21-65. For both the categories, most lenders also prescribe a minimum eligible income.

The fineprint

Administrative/processing fees: The increasing competition among the various lenders also prompts speedy processing of loans. Once you have applied and submitted the supporting documents, approval is given within 72 hours. However, before you sign the papers, you need to consider the charges levied by the lender, besides the interest rate. The tenure for most personal loans being low, the effective rate of interest could work out to be high, if the lender charges high processing, commitment or documentation fees.

Periodicity of rests: You also need to verify if the interest component is being calculated on a monthly reducing balance method or on a lower period. Some banks now offer personal loans on a weekly or even daily reducing balance basis. In these cases, the customers' effective rate of interest will be substantially lower. If you are unable to calculate the effective rate of interest, simply compare the total repayment or EMI among the options.

Pre-payment charges: Flexible options being the order of the day, companies also allow prepayment of the loan anytime after six months of availing the loan or midway through the loan's original tenure.

The paperwork: Most banks and financial institutions offering personal loans require a range of documents for processing the loan. The extent of documentation may vary depending on your relationship with the institution. For instance, if you have a salary account with the bank concerned, usually, you would be offered preferred interest rates, priority processing and simpler documentation. The level of documentation could be lower if you have a credit card from the bank or some other form of credit history with the bank/finance company.

The documents required usually include a proof of identity or bona fide of residence, of continuance of current job or profession, proof of income and post-dated cheques for repayment of the loan in equated monthly instalments (EMIs).

Documents supporting proof of identity include a copy of your driving licence, valid passport, voter's or employer's identity card, ration card, telephone bill, electricity bill, income-tax PAN card, credit card, and so on. Most of these documents could also double as proof of residence. Credit card statements, property lease agreements, LIC policy receipts, letters from employer, if you live in company-provided accommodation, and so on also serve as proof of residence.

Usually, you are also asked to provide income documents, including the latest salary slip or a salary certificate along with the latest Form 16. Some lenders also ask for the latest bank statement or passbook (where salary or income is credited) for the last six months. If you are not a salaried employee and are getting income from business, proof-of-income documents might include six months' bank statement and last two years' I-T returns. Proof of office documents could include a utility bill, Shops and Establishment Certificate, lease deed, sales tax certificate, excise duty certificate or a copy of highest professional degree held.

The innovative add-ons

A NUMBER of innovative features are being added to an otherwise simple finance product such as the personal loan, which include balance transfer facility from an expensive loan taken earlier, to a cheaper, new personal loan, approval and initial processing via the Internet (so that the time taken for disbursing the loan is lesser) and option to choose between fixed and floating rate of interest.

Some private sector banks and NBFCs offering online approvals, provide lower interest rates and priority processing, subject to completion of the requisite documentation. Another recently added feature — balance transfer facility — enables you to transfer repayment obligations from one personal loan to another, and even credit card outstandings to a new personal loan.

Using the balance transfer facility, you could pay off consumer durable loans you have taken from other banks or financial institutions, many of which may have been at a higher interest rate. The balance transfer facility is particularly relevant and popular in a falling interest rate regime. Some banks also offer a mix between the personal loan and a loan on shares.

The product helps customers leverage idle funds in the form of dematerialised shares to get a personal loan larger than what they would have been eligible for.

A floating rate personal loan, instead of the traditional fixed rate loan is also a better option in a falling interest rate situation. But this option is safe only if the loan taken is for a one- or two-year tenure.

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