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All you need to know about personal loans

By Bienu Vaghela
Last updated on: February 10, 2010 16:32 IST
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Now that the festive season is over and you have made purchases to your heart's content or have spent all your savings on weekend getaways to your favourite resorts, you are probably thinking about how to come out of the burden of various debts. Funds are probably limited now, so how do you do that? A personal loan could be the solution. However, before opting for a personal loan you should budget your loan requirement and allocate which expenses will be met from this loan.

Personal loans enable you to take care of your immediate requirements without much of a hassle. For instance you do not have to give any kind of security, collateral or even guarantees to avail this loan. Moreover you can utilise the loan amount for any purpose (except speculative purposes).

The amount of loan will depend on your eligibility based largely on your income or net take-home salary. The loan is repayable in equal monthly installments or EMIs and loan tenure varies from one to five years. Since personal loans do not require any security or hypothecation of assets, the rate of interest charged by banks is higher compared to any other secured loans which are taken against the security of an asset like your home, car, gold or even equities.

Is it easy to get a personal loan? Yes, since there is less paperwork, the bank does not have to verify any asset as it does in the case of home loans. No, as there is stringent income criteria to qualify for a personal loan. But once you make the grade it takes only about three four days for you to get a personal loan -- a lot less time than a home or car loan.

So how can you go about getting a personal loan? Here is a step-by-step process to be followed for the personal loan application process:

Get in touch with a lender after finding out which bank is offering the best rates and best services. You can compare interest rates by visiting any reputed price comparison sites. After short listing a handful of them, you can get in touch with as many lenders as possible and get them to make loan offers to you. Then negotiate with them to get the best interest rate. Also try to know if there are any special offers. After you have got all the banks to make their offers, select your lender based on the information you have in front of you.

After finalising the lender, the lender's direct selling agent will visit you and collect documents supporting proof of income, residence proof and identity. You may be required to produce copies of IT returns, salary slips, bank statements, ration card, passport, driving license and other relevant documents. These requirements vary from lender to lender.

After submitting the documents, a field investigator will visit your home to double check the facts provided in the documents, such as your place of residence, tenure at your workplace and so on. It is essential that you are present during this visit; otherwise the investigator could report that the facts you provided do not actually add up, thus forcing the lender to reject your loan application.

Once the lender is satisfied with the veracity of your documents, the loan is approved. The lender then disburses the amount through cheques or demand drafts (DD).

Now you might think that a credit card might do the trick. So how does cash withdrawal on your credit card fare vis-a-vis personal loan?

Firstly, withdrawing cash using a credit card can turn out to be very costly if you do not repay it quickly. Interest rates on credit card cash withdrawals can range from 20 per cent to 40 per cent on an annual basis depending on the type of card you use.

For most credit cards, the interest rate on cash withdrawals and credit outstanding for purchases made is the same. But here is the kicker -- for the purchases you make through your card you get an interest-free period to pay back. Cash withdrawals on your card have no such benefits; interest is charged from the moment you withdraw the cash. And do not forget the transaction charge -- this is a charge levied on the withdrawal at the ATM.

Still, personal loans have a slightly longer application process whereas cash withdrawals offer easy access during emergency. But, personal loans also have lower interest rate than credit card cash withdrawals. Apart from the higher interest rate, you will also have to pay a one-time transaction charge. Coming to interest rates, the average interest rates charged for personal loan is in the range of 12-22 per cent , whereas the average rate for interest is around 20-40 per cent for withdrawal from credit card.

Therefore, unless you are in a very real emergency where you need instant cash, it is advisable to not withdraw cash on your credit card. Remember you also have to repay it as early as possible to avoid prohibitive interest payments. If you have some time, it is always better to opt for a personal loan. It is the fastest of all retail loan products and the interest rates are a lot lower than those on credit card cash withdrawals.

Illustration: Uttam Ghosh

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Bienu Vaghela
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Apnapaisa is a price comparison engine that allows consumers in India the ability to compare the EMI, , interest rates and other fees for home loans , car loans , personal loans , business loans , credit cards , compare online quotes and features of life insurance , health insurance , car insurance , travel insurance and other general insurance policies in India.
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