How to obtain loans for our needs?

Not all will go for loans casually. Some may be forced to go for loans for various other reasons which include hunger, poverty and several other necessities. These days many financial institutions are coming forward to extend loans. Let us know the available varieties of loans so that we can go for a loan for our different needs.

Loans

Loans include personal loans, loans on assets, overdraft, credit card, gold loans, consumer loans, loans on provident funds, fixed deposits, insurance policies, shares and mutual funds and many more. These varieties will come under personal financial necessities. However, there are other kinds of loans for specific purposes such as housing loans, educational loans, agricultural loans etc as they could be obtained for those specific needs like purchasing of houses, to pursue education and for farming purposes.

Facts regarding personal loan

Whatever be the necessity, one could obtain personal loan. For a personal loan, there will not be a long process. Those who are salaried and those who are self-employed could obtain personal loan by submitting certain documents of proof such as salary proof, residence proof and proof of identity. The financial institutions will calculate 40 per cent of their net monthly income to calculate the loan amount. This loan could be from Rs 50,000 to 15 lakh based on their eligibility. 

The time limit of personal loan would be between one year and five years. The rate of interest would depend on various criteria. The loan repayment capacity, salary level, credit history and other such issues would be taken account for such criteria. Depending on all these issues, the interest could be between 13 and 32 per cent. In case of non-eligibility one could join with some other and get a joint loan. The processing charges for personal loans would wary between the customers based on their eligibility.

Before issuing the loan...

Whenever a financial institution extends loans, they will take a look into the credit report issued by Credit Information Bureau of India Limited (CIBIL). In this CIBIL report, there will be the details of all kinds of loans obtained by a particular individual till date. Whenever a loan application was rejected, that will also include in the CIBIL records. In case, if a financial institution extends loan, because of the discrepancies in CIBIL records, the interest rate would go up abnormally. Though the loan repayment due date is fixed as four years, if you wanted to repay the amount in three years, then there will be prepayment charges, which may be 5 per cent of the balance amount. One should also look into this issue.

Various types of interest

There are two types of interest, i.e., fixed interest and variable interest. Again in fixed interest there are two types – they are fixed flat rate, reducing balance rate. In the fixed flat rate interest, though the customer pays instalments every month, the loan amount would remain the same till the end of the due date. However in reducing balance rate system, the interest will have to be paid daily, monthly, or quarterly or annually. While taking loan in this system, we have to find out the total amount including the principal and interest by the time the total loan is repaid. One have to find out a loan which is profitable and for this we have to find out the terms and conditions of the loan.

Interest rates on personal loans

· The ICICI Bank would collect 13.49% to 17.50% interest. In addition to it, the bank will charge 0.5% to 2.25% towards processing fee. For prepayment of loan, an additional 5 per cent would be collected as penalty.
· The HDFC Bank is collecting 12.74% to 19.50% while the processing charge is 1.75% to 2.25%. However, the total loan amount is above Rs 10 lakh then there will not be any prepayment charges. Or else, the bank will collect 4% as penalty.
· When it is State Bank of India the interest rate is between 12.60% and 15.10% and the processing charge will be a minimum of 1.01%. There are no prepayment charges for SBI loan.
· In case it is Axis Bank, the interest rate will be between 15% and 20% while the processing fee will be 2%. For Axis Bank also there are no prepayment charges.
· Another premier financial institution, Bajaj Finserv is collecting 15% to 17% as interest, while the processing fee would be 2%. Bajaj too collects 4% as prepayment charge.

Loans on credit cards

All the employees, including those who work in private companies, who draw around Rs 1.50 lakh per year, are being offered credit cards by banks and other institutions. Government bank like Vijaya Bank is offering for the employees whose salary is around Rs 60,000 per year. Even if you are unemployed, deposit Rs 25,000 to Rs 50,000 in a bank and you can apply for a credit card in certain banks. Generally 1.55% to 2.99% interest would be collected per month for cash loans on credit cards. However, some banks like ICICI, Citi Bank and Bank of Baroda are collecting 2.50% interest rate. In case of non-payment before the due date on credit cards, there will be compound interest on such amount.

Gold loans

Financial institutions will extend loans on gold security without any hesitation as the personal loans and credit card loans are not safe for them and there might be some bad debts and hence risky. In case gold loans they could extend loan on mortgage of gold. In case of non-payment, they could auction the gold jewellery and collect their loan amount.

Gold loans could be obtained in a few hours or at the most in a day or two. You could obtain loan to the tune of 75% of the mortgaged gold value. You can just pay interest on the loan every month or else pay the interest and principal amount in a specified due date. The rate of interest depends on various issues. Generally, the financial institutions are providing gold loan at the interest rate between 1 to 2 per cent per month.

If you mortgage Rs 10 lakh worth gold, you will get Rs 7.5 lakh loan. If you obtain only Rs 5 lakh loan, then there won’t be any pressure on you on the margin. If the gold value drops and the loan amount is Rs 7.5 lakh then you may have to keep an additional Rs 50,000 worth of gold or pay the cash. Hence, you should take a lesser amount of loan for safety. In case, if the loan obtained is less when compared to the value of gold, some financial institutions will provide loan at lesser interest too.

The gold mortgaged could be either 18 carrot to 24 carrots and in case there are stones, their value would be deducted by the valuers. To obtain gold loan, the customer has to submit some ID proof i.e., either voter ID, passport or PAN card, besides two passport size photographs. Of course, some of the institutions are demanding a no-objection from the wife also.

The gold loan could be between Rs 1,000 to Rs 1 crore. The banks would fix the interest rate based on daily balance. Some banks agree to repay the gold loan in instalment basis as well, along with interest. In case of default of payment of instalment, then two per cent penalty would have to be paid. A processing worth 2 per cent will have to be paid at the time of applying the loan. Likewise, some fee has to be paid for the valuation of the gold also. In case of default, the banks would issue notices for three times and then go for auction of the mortgaged gold.Even loans can be taken through gold exchange traded fund (ETF) in an electronic form instead of the physical form of gold. The duration of repayment of loan under gold ETF would be around one year. However, some financial institutions would fix the due date as three months and keep on renewing it later.

Loans on insurance policies

Insurance is one which will financially help the family members in unexpected evening. In case if you need money urgently, then we could mortgage the endowment and money back insurance policies of three years old and gain loan through banks and NBFCs (non-banking financial institutions). Any policy will have the surrender value after three years. However, the loan amount could be decided by the loan issuing bank. Generally some 90 per cent of surrender value would be the loan amount. As it is a secured loan, chances are meagre to reject the loan on the lines of gold loans as it is a secured loan. 

Along with the insurance policy, the customer has to submit xerox copies of a photo identity card and residence proof. The HDFC bank and Tata Capital are collecting 12.5% to 19.5% interest rate on policy loans, while ICICI is collecting an interest of 11.49% to 17.5%, SBH is collecting 15.75% interest, SBI 17.65% interest. Processing fee would be 2.5% for these kinds of loans by HDFC, Tata Capital and ICICI, while SBI and SBH are collecting 1 per cent as processing fee. A maximum of Rs 25 lakh loan is being extended by the HDFC bank, while the loan duration will be from one to five years by any organization.

However, the LIC is extending loan at an interest rate of mere 10 per cent on its policies. Moreover, the interest could be paid once in six months. Moreover, the customer can repay the principal by the time of policy maturity date. In this case, the LIC would deduct the principal and pay the remaining amount in the maturity value to the customer. The customer has to first approach the bank or NBFC or the LIC and inform it that he wants a loan on his insurance policy. As these loans are secured loans there is no question of rejection and there is no need of loan history or Credit Information Bureau (India) Limited (CIBIL) report so getting loans on insurance policies is a good idea.

In case of failure

In case a customer failed to repay the loan taken on the insurance policy, and if the customer died accidentally meanwhile, then the nominees will have to pay the principal and interest and get back the policy document to claim the insurance amount. Otherwise, the banks or NBFCs will surrender the policy and get the policy amount and deduct their principal and interest and return the amount to the nominee. In case the principal and interest dues reach the policy surrender value, then the bank will waive the loan by surrendering the policy.

Loans on fixed deposits

You kept some amount as a fixed deposit. Unexpectedly, you needed some money, there is no gold to mortgage and neither the relatives nor friends are coming forward to extend help. Instead of cancelling the fixed deposit, you have an option to go to the same bank and take loan. This is called OD facility. The banks will take the original fixed deposit receipt as mortgage and give 80 to 90 per cent of the deposit value as loan. The interest rate on such loans would also be less as they collect one or two per cent above the interest the bank give on your fixed deposit. Many banks don’t collect processing charges on such loans too and there is no penalty on prepayment as well. In case your friends / relatives can’t provide financial assistance ask them to give their fixed deposit receipts if any and secure OD and promise them that you will pay the interest on it.

Loans on fixed assets

The banks and other NBFCs extend loans on fixed assets like houses, buildings and lands. The extent of loan could be 50 per cent of the market value of that property. Of course, some banks are giving loans up to 70 per cent of the market value. In case of salaried people, the loan amount would 30 to 40 months of salary. However, the interest rate would be between 13% and 16%, hence it would be better to go for such loans only in case of emergency, say experts.

Generally the interest rates will be either fixed or variable. Government banks like SBI, Bank of Baroda are charging less processing charges and they are also not imposing penalty for prepayment. But generally the processing charge will be between 0.5 per cent and 1.5 per cent and the loan repayment period will be from one year to ten years. Then it could be extended by five more years. However, when it comes to interest rate, loans on property will be better than the personal loans. Moreover the time limit will also be more.

PPF and EPF Loans

There is a facility to obtain loans either on the Public Provident Fund (PPF) and Employees Provident Fund (EPF). The EPF loan will be granted either for purchase of a plot, medical expenses, education, marriage or construction of a house or purchase of a house of flat, or to clear the housing loan, or to repairs to houses. However, for PPF there are no such restrictions. You can obtain loan from the third year to sixth year, that too only 25% of previous year’s total balance. After sixth year you have a choice to withdraw the PPF amount but can’t obtain loan. 

You can withdraw 50 per cent of the total amount accrued by the fourth year of starting of your PPF account. PPF loans could be repaid in EMIs or in one instalment as well. They will charge two per cent extra interest on the interest paid by the government on PPF. In case if you can’t repay the amount within 36 months, then the interest rate will be 6 per cent per annum. This will be deducted from your PPF account balance. If you pay the outstanding dues, then you can again obtain loan.

Loans on shares and mutual funds

Are the markets are weak to sell off the shares and mutual funds... don’t worry you can obtain loans on them as well. However, the loan amount could not be more than 50 per cent. This is called as margin or hair cut. Moreover, loans will not be given on all kinds of shares and mutual fund and they will be only on select shares.
The banks are favourable to give loans on mutual fund units and ICICI bank is collecting 10% to 12% interest on such loans, while SBI is collecting even lesser interest. However, you can’t sell them unless you clear the outstanding loan.

Overdraft on salary account

You can avail overdrafts on savings accounts in most banks, especially in those where you salary account is maintained. Even advance of one month's salary can be availed in some banks. For this you need to contact the branch manager concerned. In Jan-Dhan Yojana accounts, introduced by Prime Minister Narendra Modi recently, you can withdraw Rs 10,000 as overdraft at the rate of 12 to 20 per cent interest.

Pawn brokers

People who have no other source of securing loans, approach pawn brokers or local money lenders, who demand an interest of Rs 2 to Rs 5 per month for every Rs 100 loaned. But money lenders extract more interests sometimes.