Personal Finance

ABC of personal loans

K Mahalingam | Updated on January 24, 2018

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Don’t be tempted to borrow more just because you can



Your colleagues are going on a swanky holiday. You want to join them but don’t have the money. Or, you are facing a medical emergency and your credit card limit is not sufficient. Often, a personal loan is the perfect solution in such situations.

Apply only if necessary

While a personal loan is the most suitable choice for many purposes, there are some instances when it is worth considering other options.

One, for consumer durable purchases, manufacturers and retailers often have financing schemes, with benefits in terms of interest rates and offers which will not come with a personal loan.

Two, for buying a new car, loans are normally cheaper than personal loans. But to buy a used car, a personal loan could be cheaper than a used-car loan. Three, for home improvement projects, you can consider a home loan top-up if you have one.

If you already have a personal loan running at the lowest possible interest rate, you could top-up your existing loan.

If you have multiple dues on credit cards and other personal loans, you could opt for a balance transfer programme.

Under this programme, banks offer a single fresh loan at a discounted interest rate to close all your current oustandings (personal loan and credit card), and offer an incremental loan amount to meet your extra requirements. Also, don’t be tempted to borrow more just because you are eligible.

Choose right

Interest rate range for a personal loan varies from 11.99 to 24 per cent.

Normally, personal loans are fixed rates loans. Banks often offer different interest rate based on income levels, as well as for different categories of companies. So where you work can make a difference.

Some banks offer different interest rates for different loan periods too; similarly, some offer lower interest rates for higher loan amounts.

If possible, choose a loan with part-payment facility as you get the flexibility of using extra cash flows and reduce your interest outgo.

Similarly, most institutions allow pre-closure of loans, and normally levy charges of 0-5 per cent. You could use this facility to close the loan early if you get sudden cash flows. Make use of the several independent loan comparison websites too. Most of the time, a personal loan application can get rejected due to the applicant's bad credit record.

However, you can approach institutions (banks/NBFCs) which do lend to customers with unsatisfactory credit track records. Or you can consider the services of agencies that specialise in helping customers overcome their poor credit history.

The writer is Managing Director, RupeeZone

Published on July 12, 2015

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