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Read on to learn how you can figure out the functionality of the different loan parameters and what role they specifically play in your loan repayment pattern. BankBazaar.com’s EMI calculator is a fantastic tool that can help you manage the various loan parameters to become debt free in the most efficient manner possible.
Top picks from our Financial Expert
Currently there is a plethora of loan products that are being launched on a regular basis by the competing financial institutions in...
Today there are a plethora of options in personal loans being provided by various banks and other financial institutions...
Rakesh Sinha is employed with Patni computers. His father, a retired government employee discusses a plan for buying a plot of land...
While it is not very difficult now to take a personal loan, it is not so simple to pay back the loan. This is because personal loans...
Personal loan being a very popular financial instrument for riding a short term financial crunch, many people go for it...
Currently there is a plethora of loan products that are being launched on a regular basis by the competing financial institutions in order to woo the prospective borrower. The range of personal loan products that available in the market is wide and often confusing. Choosing the right personal loan product that suits your requirements best can be quite a daunting task. Here are a few parameters that can be used to evaluate the suitability of a personal by comparison among similar products available in the markedly currently.
Interest rates: This is the primary factor that should influence any personal loan decision. Contrary to popular belief there is a huge difference among the interest of personal loan products on offer currently. One needs to do a detailed comparison after obtaining the interest rates from online sources. There are some promotional products at certain periods during a year which banks use to enhance market visibility and popularity. It is wiser to opt for such lowered interest loans as they can have significant impact on the overall amount paid back over the repayment tenure.
Allied Charges: The various discounts in allied and additional charges that the bank offer can also help reduce the overall amount substantially when it comes to repayment. A processing fee discount of Rs. 10000 on a loan of Rs. 1000000 would imply as good a saving a 1-2% reduction in the interest rate over a 5 year period.
Repayment Tenure & EMI: These two parameters are interlinked as increasing one can result in reducing the other. Depending on the maximum repayment tenure that the banks offer a more realistic and comfortable Emi can be worked out so as to keep the personal loan servicing a lesser burden in the monthly budget and planning. However one needs to be carefully while opting for a personal loan with longer repayment period as it may come at higher interest rate. Even at the same rate of interest a longer tenure would mean huge increase in the actual amount being paid back to the bank. Thus with higher interest rates and longer tenures the amount will multiply making the borrowing unjustifiable. In such cases a comparison of the amount paid back in varying tenures must be made to realize the additional expense involved in the process.
Eligibility Criteria: This parameter cannot be overlooked by the prospective personal loan borrower as it determines whether he shall get the desired loan from a particular bank or not. All banks have their own different set of eligibility criteria. The local branch managers additionally have some authority in waiving off certain requirements based on their discretionary powers. It is a great idea to explore all such possibilities when applying for a personal loan to banks.
Approval Time: The personal loan is mostly resorted to when in urgent need of money. Thus the approval time is a vital parameter that can affect the utility of the loan. There are banks that have less than a day as the turn around time for personal loan when the documents are ready and in order. It is worthwhile to explore the feasibility of getting such loans.
Comparing these parameters would provide a much better insight regarding the suitability of the personal loan product.
Today there are a plethora of options in personal loans being provided by various banks and other financial institutions. Though the exact eligibility criteria for availing such personal loans varies from bank to bank there are few common guidelines which most of the lenders follow when it comes to approving a personal loan in India. The basic parameters that determine an individuals’ eligibility include age, profession, annual income, credit history and outstanding liabilities at the time of applying for a personal loan.
Age Criteria: The general guideline followed by most banks and other financers is that for availing a personal loan a salaried individual must between the ages of 21 to 60 years while a self employed persona has to be within 25 to 65 years of age.
Employment Stability: A salaried person with a minimum of 2 years of professional service with 1 year in current profession and a self employed person with a minimum of 5 years of total earning tenure with at least 2 years in current profession is eligible for a personal loan. However these criteria are flexible depending on other factors that the lender shall decide.
Financial Situation: The current and previous financial condition of an individual sis an important consideration while approving a personal loan. Minimum levels of income have been specified by the different banks for applying for personal loans. The financial condition determines the repayment capacity of the individual and hence the lenders take maximum cognizance of this aspect while giving an unsecured personal loan. The amount of loan that one is eligible for is also decided based on this criteria.
Credit Rating: The credit history of the applicant is another aspect that lenders would like to look into while approving personal loans. Delays and defaults in paying EMIs of other loans or credit card dues are some issues which can lower the eligibility for personal loans from banks and other financial institutions. A good credit rating on the other hand enhances the total amount that one is eligible for.
Employer: Since the loan is unsecured the kind of employer the applicant is working with is given due credit while deciding eligibility for personal loans. Public sector employees and those working with reputed and established private companies thus are better eligible for availing personal loans as compared to others as there is stability in their income.
Outstanding Credit Liability: Any other pending loans which the applicant has at the time of applying for a personal loan are also likely to reduce the eligibility in terms of maximum amount possible. Since the amount is calculated as per EMI that the applicant can possibly repay the contributions towards other outstanding loans reduce the total personal loan amount drastically.
However in the case of personal loans the local branch manager is given substantial discretionary powers which he can use to approve a loan despite limitations in the eligibility criteria of the applicant. The customer must always try to bargain the best possible deal while negotiating with the branch manager for a personal loan.
Rakesh Sinha is employed with Patni computers. His father, a retired government employee discusses a plan for buying a plot of land that looks promising in his hometown. The only set back for Rakesh’s father was that he was short of Rs. 3 L with the land costing around Rs. 10 L. Rakesh told his dad to proceed with the purchase and promised to come up with the funds in a couple of days. Rakesh knew he could easily afford a personal loan of Rs.3L with his salary of Rs.8L per annum. He planned to repay the loan in a span of 3 years with an EMI of around Rs.10, 200. Rakesh was very glad that he was able to pitch in to help his father.
In the case of Sanjay Chaudhary the circumstances were different. He had to undergo a heart surgery as a critical life saving measure. Unfortunately for him, he did not have insurance but his daughter, Srijitha, a chartered accountant employed with Ford came to his rescue and quickly ramped up the funds with a personal loan for Rs. 4 L.
The circumstances under which these personal loans were taken is a good indicator that the bank is not concerned with the end use of the personal loan but only with the individual’s ability to repay.
Why do people opt for a personal loan?
Here is a quick survey done by BankBazaar.com to figure out how personal loans were actually spent by their applicants.
For a family emergency
As evident with some of our loan applicants described above, family emergency seems to top the charts as one of the biggest reasons why people opt for a personal loan. Nearly 37% of personal loans fall in this category.
For repaying borrowed money
One of the typical uses of a personal loan tends to be for repaying small loans borrowed from friends and relatives. Sometimes people also take a sensible decision to repay pending credit card payments through a personal loan, as the interest on a credit card can be much higher than the interest rate on a personal loan. This constitutes around 10% of the loan applicants.
For buying household appliances
Personal loans are also used to buy appliances such as TV, refrigerators, air conditioners etc. This is mainly opted for by people who feel such a purchase will cause a dent in their monthly budgets. Around 16% of the loan applicants opt for this.
For holiday travel
This is one of the emerging areas where personal loans are utilised. This is generally taken by people who have the means but are facing a temporary lock in of funds. This works for around 5% of the loan applicants.
For marriages and functions
People often opt for a personal loan when there are big occasions like marriages or other family functions. Today, marriage parties cost a significant amount of money. About 17% of the loan applicants spend their loans this way.
For the down payment of a home loan
Many individuals opt to take a loan of a couple of lakhs to top up their down payment for a home loan, when they are a few lakhs short of the required amount. Around 15% of the loan applicants take up this option.
Who takes a personal loan?
From a bank’s perspective, there are two types of borrowers. The former has a high credit risk and hence is given a secured personal loan against some form of security like property, shares, gold etc. Such loans cease to be strictly personal loans. The latter has a low credit risk and become eligible for an unsecured loan.
It is immediately evident that the salaried class are a perfect match for this low risk category where the default levels are likely to be lower for the banks. In fact, if you are not in full time employment, it will be difficult to get a personal loan.
People who take personal loans are usually in their 20s or 30s. Almost 80% of the loan applicants are in the age group of 25-35 years. These individuals live in a credit culture where a personal loan , despite high interest rates, is an acceptable form of fulfilling needs and desires.
The size of the loan depends on the place, in other words, based on the average living expenses of a particular city or town. In tier 2 and tier 3 cities, majority of the people opt for a personal loan worth anywhere between Rs.50, 000 to 1 L. In tier-1 cities and metros, the majority of personal loan borrowers opt for sums anywhere between 1 L and 3 L.
There was a time in mid 2000s, when banks were more lenient with sanctioning a loan. The conditions were more flexible for disbursing a personal loan. Similar to credit cards in early 2000s, there were several defaults as well on a personal loan.
However, all that has changed drastically. Banks have become strict in lending a personal loan in the past 3-5years. Default levels were in the range of 14% to 17% as recently as 2008. Since the economic meltdown, banks have tightened eligibility norms and the default rate has come down to less than around 10-12% now.
Banks have now become very selective in disbursing a personal loan with employed individuals given the highest priority, as indicated earlier. Added to that if you are an existing customer of the bank you definitely stand to gain a better interest rate as well!
While it is not very difficult now to take a personal loan , it is not so simple to pay back the loan. This is because personal loans are unsecured loans , and come with high interest rates. As a result, the Equated Monthly Instalment factor (or the EMI) can be a drain on your salary, depending on the amount and tenure for which you borrow.
Before we get into how the EMI is calculated and what it is comprised of, let’s briefly understand what an EMI is. An EMI is the monthly amount you pay to your bank towards repayment of the loan you borrowed. All loans come with the concept of EMI and even credit card dues can be repaid in the form of an EMI. EMIs can be effected by various ways, depending on the bank you deal with. It can be in the form of a standing instruction, by giving post dated cheques or by having an electronic clearing service from your account in another bank. Whatever be the mode of EMIs, the concept of calculating EMI is the same.
The EMI Break up
An EMI, as you know, comprises of principal component and an interest component. If you have taken a personal loan of Rs. 5 lakhs for 1 year, then this amount is divided into small parts across the 5 year. If the interest rate is 15% per annum, then this interest on the loan is also apportioned across the tenure and forms a part of the EMI. In the initial years of any loan , the interest forms a larger portion of the EMI . Then, as the years go by and the loan nears completion of tenure, the principal component increases.
Let’s understand better with an example. Taking the same case as above, the EMI for a Rs. 5 lakhs personal loan for 1 year at 15% pa rate of interest is Rs. 45,129. So you will have to pay Rs. 45,129 every month for 1 year as repayment. This amount is split into principal repayment and interest repayment, with interest component being higher initially, as below:
|Month||Principal||Interest||Total EMI||Principal Component||Interest Component|
|1||Rs. 38,879||Rs. 6,250||Rs. 45,129||86%||14%|
|2||Rs. 39,365||Rs. 5,764||Rs. 45,129||87%||13%|
|3||Rs. 39,857||Rs. 5,272||Rs. 45,129||88%||12%|
|4||Rs. 40,355||Rs. 4,774||Rs. 45,129||89%||11%|
|5||Rs. 40,860||Rs. 4,269||Rs. 45,129||91%||9%|
|6||Rs. 41,371||Rs. 3,759||Rs. 45,129||92%||8%|
|7||Rs. 41,888||Rs. 3,241||Rs. 45,129||93%||7%|
|8||Rs. 42,411||Rs. 2,718||Rs. 45,129||94%||6%|
|9||Rs. 42,941||Rs. 2,188||Rs. 45,129||95%||5%|
|10||Rs. 43,478||Rs. 1,651||Rs. 45,129||96%||4%|
|11||Rs. 44,022||Rs. 1,107||Rs. 45,129||98%||2%|
|12||Rs. 44,572||Rs. 557||Rs. 45,129||99%||1%|
|Total||Rs. 5,00,000||Rs. 41,550||Rs. 5,41,550||100%||100%|
As you can see from the above table, the interest component of the EMI is very high in the initial months and gradually tapers off. The effect of a high interest component can be better understood when the tenure is longer. If we extrapolate the above for a 5 year loan, the repayment pattern for the initial few months will be as follows:
|Month||Principal||Interest||Total EMI||Principal Component||Interest Component|
|1||Rs. 5,645||Rs. 6,250||Rs. 11,895||47%||53%|
|2||Rs. 5,716||Rs. 6,179||Rs. 11,895||48%||52%|
|3||Rs. 5,787||Rs. 6,108||Rs. 11,895||49%||51%|
|4||Rs. 5,859||Rs. 6,036||Rs. 11,895||49%||51%|
|5||Rs. 5,933||Rs. 5,962||Rs. 11,895||50%||50%|
|6||Rs. 6,007||Rs. 5,888||Rs. 11,895||50%||50%|
|7||Rs. 6,082||Rs. 5,813||Rs. 11,895||51%||49%|
|8||Rs. 6,158||Rs. 5,737||Rs. 11,895||52%||48%|
|9||Rs. 6,235||Rs. 5,660||Rs. 11,895||52%||48%|
|10||Rs. 6,313||Rs. 5,582||Rs. 11,895||53%||47%|
The above will continue for 60 months (total tenure) and in the 60 th month, the principal component will be 99% and interest will be 1% of the EMI. Total interest paid on the above loan will be Rs.2,13,698, which is almost 43% of the principal.
So it is clear that you will be paying exorbitant amount as interest over the tenure of the loan. For larger loans with longer tenures, the interest burden is higher.
How can you as a borrower calculate EMIs?
These days, it is very simple to check if the EMI charged by your bank is correct or not.
If accessing online calculators or using Excel is difficult, then you can use the conventional mathematical formula: EMI = (Principal x interest rate)*(1+interest rate) n / ((1+interest rate) n – 1). Interest rate is again the monthly interest rate and n is the tenure in months.
Personal loan being a very popular financial instrument for riding a short term financial crunch, many people go for it without too much introspection. However, it is true that personal loans are a real help in emergencies, as one can avail it without any collateral as security, depending on one’s financial health and past payment credit history.
Personal loans are easily available for both self employed and salaried professionals, with a short processing period ranging from 1-4 days. But before you take the plunge of borrowing funds through a personal loan, there are certain rules that one must follow to avoid the debt trap of high interest rates and or weak repayment. Here is a look at the top five golden rules one must follow before applying for a personal loan .
Rule #1: Take a personal loan only when absolutely necessary:
The increasing age of consumerism and the swift availability of personal loans have made many people opt for loans for any purchases, even when they have sufficient balances in their accounts. While personal loans can be availed as easy as a click of a mouse button now, financial planners consider personal loans as a red mark on your balance sheet. Everyone faces a financial crunch at one point or the other. Personal loans can be a good way to bypass the immediate need of funds but the key is to have it only in case of emergencies. Unless absolutely necessary, personal loans are best avoided as they can severely dent the overall financial plan in the medium to long term.
Rule #2: Avoid multiple loan applications:
Before filing for a personal loan it is imperative to do one’s complete homework about the intricacies of the loan. Some people have a habit of filing multiple loan applications at different banks, if they are not sure that their loan may be approved from one bank. Filing multiple applications is a bad idea since banks and other non banking financial companies take a call on considering or rejecting a personal loan application depending on the individual’s credit score. If in case multiple loan applications are brought to bank’s notice through verification agencies or other, it can easily make lenders suspect you. So anyone scrapping around for a personal loan frantically is likely to face loan rejection even after complete document submission as they tend to lose their credibility.
Rule #3: Compare interest rates:
Personal loans interest rates offered by banks vary a lot. Some banks will have seasonal discounts for personal loan interest rates , while some others will have different schemes for various MNCs and privileged customers. So it is always advised to compare various schemes before simply saying ‘yes’ to the tele-marketing executive who offered you a good amount.
If you are a working professional, approaching a bank that has an official tie up with your company providing salary accounts can get you a better rate of interest than others. Another thing to note while comparing interest rates is to know that flat personal loan interest rates that appear to be cheaper usually end up are more expensive in the long run. As a general rule it is recommended to opt for monthly reducing balance option compared to half-yearly reducing or flat-rate options.
Rule #4: Focus on the foreclosure clause:
Rule #5: Borrow what you can repay:
Personal loans are quite lucrative when faced head on with a financial crunch. If used in case of an emergency period, personal loans are a good financial tool. But most financial experts recommended that any personal loan amount must not exceed more than 30-35% of your total income. Considering the high number of loan defaults in personal loans , it is essential to borrow what you can payback comfortably to the bank. Taking a personal loan of high amount and then defaulting on the EMI’s make bring with it bad credit score line ruling you out for any other loans in the future.
Personal Loan Comparison Chart:
|Bank/NBFC||Interest Rate||Processing Fee||Prepayment charges (%)|
HDFC Bank13.99%-20%0.8% – 1.75% (for Special Companies)
2% (HDFC)4%ICICI Bank13.5%-18.5%0.8% for special companies else 2%5%Bajaj Finserv15%-17%Up to 2%NilKotak Bank13.75%-19%2%5%SBI18.5%NANA
Paying your credit card dues on time is a good practise. But missing it may get you into a debt trap. With an exorbitant rate of interest, ranging from 24%- 46% annually, the credit card loans are one of the most expensive funds available in the market today. With very high finance charges, you need to reconsider your decision of paying only the minimum amount due on your credit card each month. If your credit card payments are overdue for several months, then read this article to find out alternatives available to get rid of your credit card loan.
Before we proceed further, let us look into a scenario where Nilesh Gupta, a Delhi-based businessman uses three different Credit cards and is repaying only minimum amount due on his Credit Cards for the last four months. He is finding it difficult to manage his finances and wants to get away with all his borrowings. The finance charges on these cards are as under:
|Card A||Card B||Card C|
|Balance Outstanding (in Rs.)||40,000||35,000||25,000|
|Minimum amount due (5% of balance outstanding)||2000||1750||1250|
|Interest rate (annual)||39%||40.80%||37.80%|
Using a credit card is like getting a loan. It is not free money. Every time you transact on your credit card, you are borrowing money until you pay it back later—either that month or over a period of months. If you choose to pay the money back over time, the credit card company adds interest to your account that you must pay along with the purchase amount.
If the minimum amount due or part amount, less than the total amount due is paid, interest charges are applicable (including fresh purchases, if any) on an average daily reducing balance method.
This means if Nilesh does not repay his Credit card overdue for one year (without making any fresh purchases over his card), then he will have to repay the following amount on his Credit Cards:
|Card A||Card B||Card C|
|Balance Outstanding (in Rs.)||40,000||35,000||25,000|
|Minimum amount due (5% of balance outstanding)||2000||1750||1250|
|Interest rate (annual)||39%||40.80%||37.80%|
|Interest after 1 year (in Rs.)||15500||14280||9450|
|Total dues after 1 year (in Rs.)||55,500||49,280||34,450|
Nilesh’s total balance outstanding as on date = Rs.1,00,000
His card balance outstanding after 1 year = Rs.1,39,230
This means he has to repay at least Rs.1,39,230 to his credit card providers after one year.
So as to manage his debt wisely, we suggest Nilesh to consider the following options:
|1||Convert his existing Credit Card dues into easy EMIs|
|2||Go for debt consolidation through balance transfer|
|3||Go for debt consolidation through personal loan & repay in EMIs|
|4||Negotiate with Credit Card providers for lower rate of interest|
Now let us examine these choices in detail and suggest him the best option:
Option 1: Convert his existing Credit Card dues into easy EMIs
The Banks normally charge 18% to 24% per annum for converting your credit card dues into easy EMIs. Opting for this option is better than carrying the heavy debt with enormous interest (close to 40% per annum) on your credit card and paying slowly.
Option 2: Debt consolidation through balance transfer
Balance Transfer means switching your credit card outstanding balance or dues to (typically) a new credit card. In other words, you can apply for a new credit card with a Balance Transfer option wherein your new card company will pay all your previous dues to the old credit card company. Not only this, the new card company also offers you low rate of interest on the outstanding balance and other benefits like interest free period, fixed interest rate for first 3 months or more reward points etc. depending on their internal guidelines.
However, you need to be careful with this scheme as there are several hidden charges to it. Read my article on “ How to use balance transfer to cut down existing credit card debt” to know more about this option. Generally, this option works best for those who plan to repay their debt within a few months, preferably within 3 months and for those who do not utilize their credit limit greater than 75%. Always ensure to read and understand the “Terms & Conditions” of a Balance Transfer and the finance charges applicable on the new card, before switching.
Option 3: Debt Consolidation through Personal Loan:
You can choose to avail a personal loan for consolidating all your credit card dues under one EMI. Whenever your personal loan gets disbursed, ensure to pay all your credit card dues with that amount. Start paying the ones with higher rate of interest first. Different Banks are offering personal loan for an interest rate ranging from 13%- 20%. Before we suggest Nilesh to opt for this option, let us first check if it really makes sense to avail a personal loan for debt consolidation or not. Following are the pros and cons of availing a personal loan for debt consolidation purpose:
|(i)||All your debt will get consolidated under single EMI|
|(ii)||It is easy to keep track of one EMI, rather than tracking several different cards and their payments on different due dates.|
|(iii)||As the personal loans have a defined tenure and lower rate of interest, it gives you a time line for becoming debt free with an option to save money over the long run.|
|(i)||If you miss your personal loan EMI, or Default on personal loan, then it can affect your credit score badly. This can turn out to be a rather bad option if you are not financially ready for a personal loan EMI. However, paying only minimum dues on outstanding can save you from the tag of a “defaulter”.|
|(ii)||Getting a personal loan for a longer tenure (say 60 months)can reduce your EMI burden today, but in the long run, you might end up paying higher amount to your loan provider|
|(iii)||Personal loans are expensive than other secured loans like Loan Against Property, Loan Against Gold etc.|
For getting maximum benefit from personal loan, aim to pay higher EMI for a shorter tenure without defaulting. However, analyse your financial situation and commitment for repaying the loan before you select this option. This option can turn out to be a good as well as bad option depending on your current situation.
Option 4: Negotiate with credit card Company for a lesser rate of interest
If you are unable to repay complete credit card dues, then before moving on to any other options, discuss this situation with your credit card provider. If you show your interest to repay their dues at a lower rate of interest, then so as to retain their customer, they might get ready to reduce the interest rate for you.
This will save you from documentation and other process of moving to another lender. But you still need to manage multiple credit cards and the new rate offered can still be expensive than that of a personal loan.
The above mentioned options can be good or bad depending on your particular situation. You need to analyse all the options and pick the one that works the best for your situation.