In India, various personal credit finance modes are available, catering to the different needs and requirements of the population. As of my last update in September 2021, here’s an overview of the popular modes:
Personal Loans
Definition: Personal loans are unsecured loans provided by financial institutions, such as banks and non-banking financial companies (NBFCs), to eligible individuals. Being unsecured means that borrowers do not need to provide any collateral or security to avail the loan.
Characteristics:
- Purpose: One of the primary features of personal loans is that they are multipurpose. They can be used for any personal financial need, ranging from funding a vacation or a wedding to paying for medical emergencies or consolidating debt.
- Unsecured: As mentioned, personal loans usually don’t require any collateral. Because of this, lenders generally consider the borrower’s credit score, income, employment status, and repayment capacity more closely than they would for secured loans.
- Fixed Amount: The amount eligible for a personal loan depends on the borrower’s creditworthiness and income. Lenders have a minimum and maximum loan amount they offer.
- Interest Rate: Personal loans tend to have higher interest rates than other secured loans because they don’t involve collateral. The exact rate varies based on the lender, the borrower’s credit score, and prevailing market conditions.
- Repayment Term: These loans come with a fixed repayment term, which is the amount of time the borrower has to repay the loan. This term can range from 12 months to 5 years or more, depending on the lender and the loan amount.
- Monthly Installments: Borrowers repay personal loans in fixed monthly installments, which include both the principal amount and interest.
- Fees and Charges: Apart from interest, personal loans may come with other charges, including processing fees, late payment fees, and prepayment penalties, if you repay the loan before the end of its term.
Advantages:
- Quick Disbursal: Personal loans usually have a faster approval and disbursal process, especially with the advent of digital lending platforms.
- No Collateral Needed: They are accessible to borrowers who may not have assets to pledge as security.
- Flexibility in Usage: They can be used for a variety of purposes, unlike specific loans like home or auto loans.
Disadvantages:
- Higher Interest Rates: Being unsecured, they often come with a higher interest rate than secured loans.
- Limited Amount: The amount you can borrow might be limited, especially if you have a lower income or a less-than-stellar credit score.
- Potential for Misuse: Due to their flexibility, they can be misused for non-essential expenses, leading to unnecessary debt.
Eligibility: While criteria vary among lenders, common factors include the applicant’s age, employment status, income level, credit score, and existing liabilities.
Application Process: Applying for a personal loan typically involves submitting an application form, either online or offline, along with requisite documents such as proof of identity, proof of address, salary slips, and bank statements.
In conclusion, personal loans are an excellent financial tool when used judiciously. However, potential borrowers should evaluate their needs, research available options, and understand the terms and conditions before availing one.
Home Loans: Specifically meant for purchasing residential property. They usually come with longer repayment tenures and offer tax benefits.
Car/Auto Loans: Loans given to purchase vehicles. They can be secured (where the vehicle acts as collateral) or unsecured.
Education Loans: For funding higher education in India and abroad. Some of these loans also provide a moratorium period (i.e., during which one doesn’t need to repay, typically until the course is completed).
Credit Cards: A form of revolving credit where individuals are allowed to borrow funds up to a certain limit and repay with interest. They can be used for purchases, cash withdrawals, and come with various benefits like reward points, cash back, etc.
Consumer Durable Loans: These are specifically for purchasing household items like refrigerators, TVs, air conditioners, etc. They often come with no or low-interest rates if tied up with a promotional offer.
Gold Loans: Loans where gold jewelry or coins are pledged as collateral. They are popular due to the quick disbursal time and minimum documentation.
Loan Against Property (LAP): This is a type of secured loan where one can pledge a residential or commercial property to avail funds.
Payday Loans: These are short-term, high-interest loans designed to tide over immediate financial needs until the next payday. They’re not as popular in India as in some western countries and come with stringent regulatory checks.
Overdraft Facilities: This allows account holders to withdraw money in excess of their account balance up to a certain limit. Interest is charged only on the amount overdrawn.
Peer-to-Peer (P2P) Lending: This is a digital platform where individual borrowers can borrow from individual lenders. It’s an alternative to traditional banking and is gaining traction in India.
Microfinance: Small loans provided to low-income individuals or groups. They are especially popular in rural areas and among small businesses.
Employee Loans: Offered by employers to their employees, sometimes in tie-ups with financial institutions. Interest rates may be lower than regular personal loans.
Financial institutions continually evolve their product offerings, and the market may see new products or variations over time. Before availing any form of credit, one should always thoroughly understand the terms and conditions, interest rates, and other associated costs.
