Saral Credit, a fin-tech platform, recently surveyed that roughly 67 per cent of India’s population had taken a personal loan at least once to meet their financial requirements. As per the survey, 36 per cent of respondents took out a loan to buy or renovate a home, nine per cent took out a personal loan for travel and vacation.
Borrowers however reiterated how they factor in the interest rates before deciding from whom to seek their loans. For example, 77 per cent of the respondents shared how they would prefer to take personal loans from banks while 14 per cent preferred non-banking financial institutions (NBFCs) over banks.
Ironically, the demand for personal loans continues to grow despite the continued interest rate hikes by the Reserve Bank of India (RBI). This is a surprising fact to many as in most cases high-interest rates have forced many people to either refrain from taking loans or prepay them to get rid of the burden of increasing interest rates.
Viral Bhatt, Founder, Money Mantra shared, “In case of an urgent need for funds, personal loans can be a quick and easy source of funds for people who have an urgent need for money, such as to pay for unexpected medical bills, home repairs, or other unexpected expenses. In such cases, the high-interest rate may be seen as a necessary cost for obtaining the funds quickly. Also, for some people, personal loans may be the only option available to them if they do not qualify for other types of loans, such as credit cards or home loans.”
The Do’s and Don’ts of personal loans
Taking loans can have a positive effect on your credit score as repaying the same in regular instalments highlight the borrower’s creditworthiness and financial fitness in the long run. Because the majority of respondents in the survey are from the middle class, the results highlight this group's growing affinity for loans.
Now that you have already sought a personal loan, the idea must be to repay it within the stipulated period. One option is to borrow only what you require. Better, if you compare the interest rates offered and then decide which lender would be in sync with your borrowing needs. Not many borrowers compute the overall cost, thus, causing them to repay more than what they had estimated.
So, how should borrowers estimate the overall cost of a personal loan before seeking one? Suresh Sadagopan, MD & Principal Officer, Ladder7 Wealth Planners said, “The best way is the direct way - Ask the loan provider what is the interest rate they are going to charge per annum, what are the other costs involved. That would make the overall costs clear and help in taking an informed decision”
How to find the right lender?
Apart, the survey also pointed out how many borrowers found the loan application process complicated and utterly cumbersome, which means that either the lenders were unable to provide online services or continued with the paperwork process despite most financial services being now digital. Roughly 16 per cent complained about how they were unable to connect with the right lender.
CA Kanan Bahl, a financial educator and growth consultant said, “Be in contact with two to three bankers. They don't tell you many terms till the end. I know a very big Pvt Bank which offers loans at the cheapest rate but will tell you a few days before your registry that you need to pay for Insurance which might be two to five per cent of your amount. Having sanction letters from two to three bankers will help you in negotiating. When purchased from outside the banking channels, insurance products might be cheaper as they involve lesser commissions.”
Sadagopan added, “The lending rates of most organisations are in the public domain and hence one can select a few from them to do the exploratory work. One needs to check not only the rates of interest charged but also other charges like processing charges, documentation charges, commitment charges etc. to arrive at the overall cost. If the bank they have an account with is competitive, we suggest that they check with them first. If there is an existing relationship, the documentation part becomes easy and an existing customer can get lower charges or waivers.”
How to best avoid taking personal loans now?
The personal loan segment is growing, thanks to the growing availability of information on the web. Borrowers increasingly show interest in loans and similar financial products that financial institutions sell. Considering the novel aspirations of the new generation and the effect of inflation on our daily essentials, it is no surprise that the personal loan market has gone up much higher than before. However, one cannot help but avoid the fact that these loans are costly, which means that inclined borrowers may consider them only they find their other financial resources completely dried up.
So, how can you best avoid taking personal loans now that rates are increasing and expected to go up further again in a few months? Bhatt explained, “First, look for alternative money options. If you need to make a large purchase or pay off debt, consider alternative options like balance transfers, low-interest credit cards, or negotiating a payment plan with your creditor. These options may be more cost-effective than taking out a personal loan. Also, avoid making unnecessary expenses. Evaluate your spending habits and try to cut back on unnecessary expenses. Consider reducing your dining out, subscription services, and entertainment expenses.”
How to repay high-interest loans quickly?
The interest rates on loans are not expected to come down soon. One way is to pay more through regular equated monthly instalments (EMIs). The other way is to opt for an extended tenure. However, choosing the latter means a much higher payout in the long run. This also implies unwanted expenses at the cost of your savings and investments. The best way out is to consider prepaying the loan to get rid of it quickly. The internet has connected us to the world, thus, making it possible to look for alternative or passive investment options. Considering how you may easily earn more money through passive investments, you may start paying over and above the predetermined EMIs. You may either pay some extra amount every month through higher EMIs or quarterly, half-yearly or annually as you deem fit.
The idea is to take a personal loan only when needed and repay it in time to preserve your creditworthiness, which will go a long way in enhancing your credit score, thus, opening up the scope for more loans in the future.