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Personal loans: Treat it as a contingency only
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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Consider this scenario — you need a substantial amount of money but you don’t have assets or a guarantor for a mortgage. You want to use the money for an international vacation towards wedding expenses or any other personal goal that is not a specific loan product.
Trust a banker to come up with a solution for it — in the form of a personal loan!
Although this scheme of availing an unsecured and unconstrained loan sounds tempting, it comes with its own set of clauses since every financial establishment has to protect itself against potential defaulters.
What does a personal loan entail?
Flexibility: A personal loan can be availed for an amount as low as ₹15,000 to as high as ₹30 lakhs, with a repayment term ranging from 6 months to 5 years. The sanctioned loan amount can be used for any purpose unlike a housing loan, education loan, auto loan, etc.
Eligibility: The lenders or financial institutions decide the eligibility criteria based on age, employment history, current earnings, nature of job (salaried/self-employed), repayment history with other lenders and most important of all, the CIBIL score, which is a snapshot of the loan applicant’s credit worthiness.
Holding a fixed deposit or salary account with the lending entity is always an added benefit.
Here the lenders give prime importance to the borrower’s credit characteristics since the loan is provided without any security/collaterals.
No security, minimal documentation and swift proposal processing: This loan doesn’t require any form of surety to be submitted and requires minimal documentation that usually pertains to KYC income proofs (salary and IT returns) and the latest bank statement. The processing time is just a few business days.
High interest rates: Since it is an unsecured loan with no collaterals, the bank levies high interest rates to make up for it.
No check or restriction on end use: Unlike housing loans, where an individual is confined to using it only for the construction or purchase of a house by keeping the legal documents of the property as collateral, personal loans do not come with any such baggage.
Sundry charges: Loan processing fee, installment delay charges, cheque bounce charges and prepayment charges are some of the sundry charges that have to be taken into account. Depending on the lending entity, all or some of the listed charges may be levied.
Cost Vs Benefit: Personal loans are one of the most expensive forms of loans available in the market. It should be kept in mind that opting for a personal loan should be a contingency option rather than the primary option of taking on debt. Also, it is your responsibility as a borrower to conduct due diligence and thorough analysis of cost versus benefit before availing the loan.
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