The demand for personal loans has disappeared lately. The recent report from CRIF High Mark (a credit bureau) indicates that personal loans saw 4X growth in creations (volume) from 39.9 lakh accounts in FY19 to 158.1 accounts lakh during FY22.
Gaurav Chopra, CEO and Founder of IndiaLends says, “Borrowers opt for personal loans for various reasons including weddings, travel, business, medical emergencies, etc. There are processing fees, repayment policy, duration, etc. A borrower should understand and consider the said factors before applying for a personal loan.
Implications for borrowers: The recent decision by the RBI to increase the repo rate by 40 basis points, according to Chopra, will increase the amount of interest on a personal loan. A borrower will now pay 0.6% additional interest on a 3-year loan.
Tackling high interest rates: As banks begin to pass on higher interest rates to customers, experts say it’s important for borrowers to take stock of their financial situation. “In the event that a client is unable to pay a higher EMI amount, the borrower may request an increase in term. In the event that a borrower opted for lump sum payments, it would help the borrower to make more frequent payments, as a lower principle would attract a higher interest rate,” explains Chopra.
Finally, for new borrowers, if the higher EMI crosses their repayment threshold, it is advisable to reassess the loan need and borrow only what is needed. “Under no circumstances should the borrower miss or delay their payments, as this can be a double whammy of additional charges and a lower credit score,” he adds.
Here are some other credit options, such as secured loans that usually attract a lower interest rate, that one can also explore;
Employees Provident Fund (EPFO): A loan seeker who has an EPF account can opt for a loan of up to 90% of the total deposited amount.
Public Provident Fund (PPF): Being a long-term savings vehicle of the Government of India, a loan seeker can take out a loan against the PPF in the year after the account is opened, from year three to year five .
Gold: Chopra points out, “It can be pledged as collateral and is a great alternative to unsecured personal loans. Interestingly, this is an avenue that does not require a good credit score. The loan amount depends on the amount of gold deposited.
Property: Getting a loan on any property is easy. Home loans can be used up to 80%. Note that over time, as the value of the property increases, so does the eligibility.
Fixed Deposit: Fixed deposit accounts can be easily used to get a loan of up to 90% of the FD amount.
Insurance: A loan against life insurance can be used by the user, but an interest rate of 10.50% to 12.50% is charged.
Mutual funds: Mutual funds can be used to obtain a loan. An agreement is made in which the financier lends the purchased unit.
“While there are multiple alternatives for availing personal loans, each option has its own set of advantages and disadvantages. The loan seeker should understand their needs and choose wisely,” concludes Chopra.