LoanRaja Blog- Personal Finance Guide

Everyone deals with having to wriggle out of a financial crisis at some point. If you have meticulously planned your finances and investments a temporary cash crunch may be easier to deal with. But very often we fail to do so although financial experts have been giving us this sound advice for many generations now. There may be many reasons for not being ready for such a situation either because you don’t realize it could happen to you, you simply because you can’t afford it, you spent your savings on higher education or your funds are all locked on long-term investments.

When you are suddenly hit by a financial road block the first thing to remember is – DON’T PANIC! Misfortunes hit everybody — whether it’s losing a job, an illness or just an unexpected expenditure. You still have several avenues you can explore including sounding out friends and relatives to help you tide over the situation. If that’s not the most comfortable option for you many companies offer employees personal loans at subsidized interest rates. You could check with your company to see if they offer such a facility. The biggest advantage would be that it will be hassle free when compared to a bank loan. Some other options available to you are listed below:

Bank Overdraft

Your bank may be willing to offer you an overdraft facility which will allow you access to cash in no time. A bank overdraft is relatively cheap and there is no paperwork involved in this. You can also apply for a loan or overdraft using you insurance policies, mutual funds, national saving certificates or government bonds, shares, securities etc. A loan against securities are much cheaper than personal loans and the borrowing limit may differ but is usually in the range of 60-65 percent of the values of these securities.

Loan Against Property

Offering a collateral is the best means to get a loan in an emergency as this gives the lender some security and can take care of the lender’s risk. This may also allow you to get the secured loan at a substantially lower interest rate than you would have gotten a secured loan for. If you are taking a loan against property the downside is that processing may take longer. If you need urgent cash, a loan against gold or car would probably be processed faster than a loan against property.

Personal loans

Personal loans are growing in popularity as a source of immediate cash. Although interest rates on personal loans are on the higher side many banks can sanction personal loans in less than a week. Personal loans offer consumers easy access to funds without the need to provide any security and if you already have an account with the bank it may be much easier for you to get a personal loan.

Credit card

Credit cards come in handy in a crisis situation and allow you to withdraw cash from ATMs. A credit card will usually have a cash withdrawal limit and interest charged on cash would also be different from what is levied for card usage. But if you need instant cash with no processing time, this is definitely the best option.

Moneylenders

The neighbourhood moneylender provides you money in an emergency without fuss. But you should resort to this as the last option after exhausting all other avenues. Interest rates of 50-60 percent annually are common with private moneylenders and they may take advantage of your desperation by charging hefty interest rates.

Personal loan is an any-purpose loan, which is given by financial institutions normally without any kind of security or collateral unlike a housing loan. It meets a customer’s urgent need for cash and the lender is not bothered about the purpose of the loan. It can be for anything - a professional college admission, daughter’s marriage, home furnishing, medical treatment or even a holiday abroad.

Such a loan is usually available for a five-year period. Although the interest rates on personal loans may be higher than other types of loans, the advantage is that it requires less paper work and is often sanctioned in as little as 72 hours. For this very reason you must always do your homework on interest rates and negotiate offers from multiple banks to get a deal that offers you finance at the best rates.

Eligibility

Although the promotions from banks may often mislead loan seekers into believing that personal loans have no eligibility criteria, the reality is not as simple. When you are seeking a loan, keep in mind that a personal loan is in essence an unsecured loan. These being the case banks scrutinize every application to make sure you have the ability to repay this loan. This is done by verifying an applicant’s financial profile and credit rating which fit in two broad categories:

• Salaried persons between the ages of 21 and 60
• Self-employed individuals between 25 and 65

Various lending institutions may have different eligibility norms and hence the loan amount and interest rate they offer you may differ based on these criteria. For example, at the time of writing ICICI Bank requires a net monthly salary income of Rs 8,000 whereas for HDFC Bank it is Rs 7,000. SBI and Nationalised banks have different eligibility levels for customers in metros, urban and non-urban centres. The loan amount also you are offered will also differ from bank to bank as the personal loan limit depends on the borrower’s income, repayment capacity and credit rating.

For a personal loan the minimum amount sanctioned is usually around Rs.24,000 in metro and urban centres and Rs.10,000- in rural/semi-urban centres. The maximum can be 12 times net monthly income for salaried persons subject to a ceiling of around Rs.15 lakhs, but again this may vary depending on various factors. Some foreign banks like Standard Chartered and Citibank have higher limits. Most banks also maintain detailed lists of approved companies and organizations whose employees will find it easier to get a personal loan. Most public sector banks insist on a guarantor for personal loan even for existing account holders.

Documentation required is for a personal loan is usually very basic but production of all relevant documents is essential for fast approval of the loan. The following are the most important documents you must keep handy when applying for a personal loan.

• Identity proof: A copy of passport or driving licence or voter ID or PAN card or employee identity card as identity proof and signature proof.
• Residence proof: A copy of passport, ration card, telephone bill, voter ID, or LIC policy.
• Proof of income: Latest salary slip and Form 16 for the last year and bank statement for the last 6 months. IT returns for the last 2 years with balance sheet and profit and loss account as a proof of income for self-employed.

A summary of charges

When seeking a personal loan a key factor in selecting a lender would be the rate of interest and these rates may differ based on your profile. If you are employed with a reputed organization earning in a higher income bracket, residing in an upmarket area and have a good credit record you have a better chance of negotiating a lower rate. If you have a stable financial profile there is always scope for getting a better rate which can be anywhere between 12 and 30 percent per annum.

You may also incur other charges when taking a personal loan like processing fee, documentation fee, pre-payment penalties and switching charges which will add to the cost of the loan. . Some banks also charge a few administrative costs such as charges for duplicate statement, charges for rescheduling and service charges of up to 3% of the loan amount. So be very clear with the bank about disclosing their charges levied as on taking a closer look at these their claim on lower interest rates may not be as inviting as it sounds and can even be misleading.

Disbursal

Once a personal loan is approved disbursal is fast with the bank giving you a sanction letter followed by the loan disbursal either by cheque or demand draft. Some private banks and foreign banks that use direct selling agents to process the loan application faster and disburse the loan within three working days. Public sector banks may take slightly longer.

Tenure Repayment

You repay a personal loan through equated monthly installments (EMIs). The tenure ranges from 12 months to 60 months. Shorter the tenure heavier will be the EMI. You can make the repayment through post-dated cheques or through ECS. You also have the option to prepay the loan but it can be costly as many banks charge up to 5 percent of the outstanding amount as penalty. You can also transfer your loan to another bank which charges a lower interest after assessing the cost of transfer.