10 things to consider when taking a loan

Today, you can get a loan catering to virtually every need that arises. Home loans, education loans, personal loans, consumer durable loans, wedding loans, vehicle loans, used car loans and home improvement loans are the most common.

Want to buy jewellery? State Bank of Hyderabad's offers Vanitha Gold Loan towards buying gold jewellery. CanJewel of Canara Bank and Swarna Abharna from Indian Bank also help meet expenses for purchase of jewellery.

Need cash for a holiday? SBI's Easy Travel loan, from Rs 24,000 to Rs 2,50,000, covers your foreign and domestic vacationing needs and pays for the cost of the ticket, hotel stay and visa. Bank of India's Star Holiday Loan offers up to Rs 2,00,000.

While home improvement loans facilitate internal and external repairs and structural improvements like painting, plumbing and tiling, Allahabad Bank offers a furnishing loan for just upholstery and furniture.

Have a family function? ING Vysya Bank offers specific loans.

United Commercial Bank has a short-term pension loan amounting to 10 times last pension received and payable in two years.

Computer software loans, loans for doctors, hospital bill loans are some other options on the loan platter.

Out of all, personal loans are the most convenient because the customer does not have to explain why he needs the money. He can use it for whatever purpose he requires.

The most exciting part is that, for most of these loans, often no guarantor, security or collateral is required. Within 72 hours, the cheque arrives at your doorstep. What's more, in some cases, you don't need to have an account at the bank.

Here, we tell you what to look for when opting for a loan.

• Salary not sufficient to get a substantial amount? Try applying jointly with a parent or spouse so that income can be clubbed.
  
• The interest rates charged by public sector banks are generally less than those imposed by the private banks. In the case of some loans, the difference may work out to 5% or 6%.
  
• As personal loans are allowed with no queries asked, you can even use it to clear other debt. For example, if you are paying 30% on your credit card dues, then take a personal loan and pay off that debt. The personal loan should come between 18% and 21%. If the bank has a tie-up with your company or you are a customer, you may get it for less than 18%.
  
• Choose a bank loan where the interest is calculated on a monthly reducing basis as against an annual reducing basis. You end up paying less when the interest is calculated on a monthly reducing basis. So the principal amount you repay this month will be deducted from next month's interest calculation.
  
• Always explore the loan option with your bank first. Being a customer, you may get various benefits like minimum documentation or waiver of other fees.
  
• Check for the prepayment penalty if you plan to repay the loan before the term ends. This is all the more important if the loan is of a long tenure and you are looking at prepayment.
  
• Check clauses with utmost care. For example, State Bank of India grants pensioner loans but only if the pension is deposited at any one of its branches. Or, take the case of SBI's Easy Travel loan. This is a holiday loan amounting from Rs 24,000 to Rs 2,50,000m covers foreign and domestic vacationing needs and pays for the cost of the ticket, hotel stay and visa. But you must be an employee of a reputed institution (the latter wuill be decided by the bank).
  
• Look out for other benefits too. For example, a foreign bank offered the EMI refund scheme where the last Equated Monthly Installment was forfeited if you paid all earlier installments on time.
  
• Some banks give insurance free. For instance, if you take a home loan with some banks, you get an insurance cover free. Should you die, then the insurance company pays the bank back the balance loan. So your family is not in a soup. A private bank insists that, with a personal loan cover of Rs 1,00,000, insurance of Rs 285 must be deposited. So if you are in a financial crunch, the insurance company pays three EMIs to the bank.
                                                              
• Budget for the extras. When taking a loan, you will have to pay a downpayment. For instance, if you are buying a consumer durable costing Rs 55,000, you may have to pay Rs 5,500 (10% of the amount as downpayment). Some may insist on 15% while others may pick up the entire tab. Also consider the various fees.
  
  If you are taking a Rs 5,00,000 loan and the processing fee is 2%, then you will have to pay Rs 10,000 as the processing fee. So keep low processing fees in mind when looking for a loan of a high amount.
  
  If the bank says they do not charge any processing fee, probe some more. Do they charge an administration fee? Is it high in comparison to the other players? Do they charge an application fee? Sometimes, for home loans, they mean 'no processing fee for work done by bank' and demand charges for valuation fees, stamp duty and lawyer fees.
  
  Incidentally, processing fees tend to be less when public sector and nationalised banks than private and foreign banks.

Meenakshi Subramaniam is a former IRS officer, residing at Kolkata.

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