Personal Loan
The distinctive feature of a personal loan is that there is no security, collateral or guarantors required to be given in order to avail of this loan and this loan can be used for anything that one desires be it a car, jewelry or a holiday or a sudden vacation planned with the family, basically to fulfill any requirement. Personal loans are time related i.e. one may need it for a daughters marriage, to buy some necessary consumer durables or retire some old debts.The eligibility of an individual for a personal loan is and the amount of the loan is arrived at after taking into account his net take home salary. The tenure of the loan could vary for one to five years and repayment is in monthly installments or EMI’s as they are called.
Obviously, since these loans do not require any security hypothecation of assets there will be some penalty and that is a higher rate of interest as compared to any other secured loans. Banks today are vying with each other to market personal loans and in the fiscal ’05-06, personal loans constituted one-fifth of the total non-food gross bank credit followed by a sharp rise of 44% or Rs 1, 08,697 crore in the fiscal year ending March ’06. These included loans for consumer durables, housing, advances against deposits, advances to individuals against shares and bonds, credit card outstanding and education loans. Even though personal loans do not form a very substantial segment of the retail loan portfolio of banks their share, particularly in the private and foreign banks has been rising steadily.
When going for a personal loan, what the customers look for besides the cost of credit which is the primary consideration of course is also the documentation requirements of the bank and lastly the very important factor is the speed with which the loan is approved.But since the interest rates are higher as compared to other loans, one needs to excersise some caution and check all the other possible alternatives. It would be advisable to go in for a tailor made loan such as a vehicle loan or a housing loan or an education loan etc. The basic principle underlying a personal loan is the risk versus return theory, in other words, the more the risk associated with an individual, the higher the interest the would be charged on that particular loan and conversely, the lesser the risk, the lower the interest rate.
Personal loans can be categorized as secured and unsecured loans.
If the loan is unsecured this means that one can get the loan without pledging one’s property to the bank which suits those who do not own property. Though it is also true that even if one owns property, one can still get the loan without pledging one’s property if one is hesitant to do so. Though ironically property owners are considered less risky and get preferential treatment from banks as regards acceptance of their loan application and also better rates.
If a loan is secured, this means that one’s house is used as security against the loan and they also can be used for any legitimate purpose though some lender do impose restrictions on the use of these loans. The benefits of opting for a secured loan is that one could have the choice of fixed or discounted rates of interest.Since personal loans are target generally salaried individuals, the documentation is not complicated and all that one needs is a salary slip, bank statement and a proof of identity
Ironically, the one feature of a personal loan that makes it the most attractive to a consumer is also the feature that makes it the most costly which is that the lender does not require any security or guarantor or hypothecation of assets. This additional risk that the lending institution is exposed to is covered whereby there is a difference of 5% of more on the lending rate for an asset backed loan and an unsecured loan which leads to a high rate of interest of 21% compared to any other secured loan.To avail of a personal loan, one should be at least 21 years of age and not more than 58 years.
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