New Delhi-based software professional Nibedita Sharma had long dreamed of renovating her house. The only stumbling block was money. There were always expenses that needed urgent attention, putting the renovation on the back burner. Until she noticed leaks through the ceiling and couldn’t put off the renovation any longer. Sharma, 40, nervous, decided to take out a personal loan. To his surprise, many banks, non-bank financial companies (NBFCs), and fintech companies lined up to offer him a loan within seconds. All she had to do was click a few buttons and the money was credited to her account. “My good credit rating and my long relationship with the bank helped me get an 11% personal loan [interest] in a few minutes. I will pay monthly EMIs (equivalent monthly installments) over a two-year period,” she says.
Like Sharma, many Indians are fascinated by the ease of access to personal loans. Access to funds is no longer limited to people living in metros or with good credit scores. With fintech companies taking over the space, even people with low or no credit have a better chance of getting a personal loan now.
While personal loans may be readily available, how do you get them cheap? Look for the lowest rates and opt for a fixed rate loan as interest rates rise. The lower the rate, the smaller your EMI. Lenders look at many factors, including credit rating and loan profile.
There are a few avenues that offer personal loans. While some charge you low interest rates, others offer flexible repayment options. Choose the one that suits you best. Banks offer personal loans at the lowest interest rate if you have a good credit rating. A long and sustained relationship with the bank makes this even easier. In the case of a pre-approved loan, you don’t even need any documents. The only downside is the lack of flexibility. Banks generally do not allow partial prepayment.
NBFCs may be your second option. “NBFCs have been active proponents of using technology in lending and thus providing speed and convenience, making it their biggest USP. Offers on loan amount, interest rate and term are competitive like banks and are adjusted according to the client’s risk profile. Another great advantage is flexible reimbursement options and fully transparent fees,” says Manish Chaudhari, President and Chief of Staff of Poonawalla Fincorp, a Pune-based NBFC. Some of the popular names include Bajaj Finserv and Home Credit among others.
Another option is fintech companies such as Navi Finserv and LoanTap. These are popular among millennials and the self-employed for their looser eligibility criteria. But there are downsides. “Not everyone is technically literate. Not everyone has a smartphone. And it can be addictive,” says Mel Gerard Carvill, non-executive director and board member of Home Credit NV, a global provider of consumer credit services.
The growing demand for personal loans is reflected in the recent CMIE economic outlook report. Outstanding personal loans between December 2021 and March 2022 increased between 2.4% and 4%, it says. With the economy emerging from the shadow of Covid-19, demand for credit has increased. The CMIE says a recovery in bank credit demand started from the second half of FY22, which analysts say looks set to continue into FY23.
Among the different types of personal loans, an increase in credit card spending, home loans, auto loans, loans for consumer durables and other personal loans contributed to the surge. Together, they account for more than 90% of outstanding personal loans, which grew by Rs 57,165 crore month-on-month in April 2022. However, the month-on-month growth has hit a five-month low of 1.7%, due to inflation affecting consumer demand. This figure could come under further pressure, with the Reserve Bank of India (RBI) raising the repo rate twice in just 36 days to 4.9%. As personal loans multiply, is it the right time to take out one? Here are some factors you should consider.
In this scenario of rising interest rates, before applying for a personal loan, it is important to compare the interest rates offered by lenders, as the lower rate will lower your EMIs. Your credit score is also directly related to the interest rate. And, credit score is the only factor that is under the control of borrowers that has an impact on interest rates.
A credit score is a three-digit number assigned to an individual on a scale of 300 to 900 points. It is based on each office’s unique algorithm; a score of 750 or more is considered good. “To get a cheap personal loan, make sure you maintain a good credit score because a bad score would mean higher interest rates…If you have a credit score above 750, your chances of obtaining a personal loan increases considerably,” Satyam explains. Kumar, CEO and co-founder of LoanTap, a fintech company for online delivery of retail asset products. Another factor that determines the cost of your loan is your profile. Your income level as well as your occupation also affect interest rates.
Low interest rates should definitely be your only main criteria when choosing a personal loan. According to experts, opting for fixed rate personal loans would always be preferable in times of rising interest rates. “Those who benefited from personal loans with floating interest rates would be hit by rising repo rates,” says Sahil Arora, senior director at Paisabazaar, a fintech company.
Arora adds that public sector banks (PSBs) generally offer personal loans at floating interest rates, while most private banks offer personal loans at fixed interest rates. In addition, one should opt for banks with a good CASA ratio because these lenders tend to increase their rates at a slower pace than banks with a low ratio. CASA is the ratio of current account and savings account deposits to total bank deposits.
There are also other variables you need to consider such as processing fees, legal fees, criminal charges, and even prepayment fees. Similarly, personal loan borrowers should confirm whether the interest rate, processing fee, term, prepayment, foreclosure fee and other personal loan features written in the personal loan agreement are the same. than those communicated during the onboarding process so that there are no surprises after taking out the loan.
Before taking out a personal loan, explore the other options available in the market. For example, if you want to take out a personal loan to buy furniture or electrical equipment, a better deal might be to take advantage of the no-cost EMIs offered by many stores for terms ranging from six to 12 months. So be patient and compare all offers from all available lenders before you jump in.
It is very important that you get a personal loan from sources regulated by the RBI, and not from unscrupulous lenders, who charge you astronomical interest rates and resort to harassment in case of default. “As a consumer, you should be aware of the remedies provided by industry regulators. Like in this case, the RBI, so you can pass it on to the proper authorities,” says Kumar of LoanTap.
Historically, in times of emergency, people used to borrow money from close friends and families or from local moneylenders. With the rise of fintech apps, you can now get loans from all sorts of sources. However, be careful when opting for these. “All of these sources are new, and regulators have been a bit slow to bring them all into scope. Because of an argument I always make, if you take out a loan, make a deposit, or buy a insurance policy, you shouldn’t have to worry about who the supplier is, you shouldn’t have to think that I’m more at risk because I took it from supplier A rather than supplier B. regulation should be about the product, not the supplier, so as a consumer I should have equal protection,” says Carvill.
Sharma patched his leaky ceiling by opting for loans from regulated sources. With loans flowing like water, don’t be lured into easy money; choose the right financing option and make your dream come true like her.