If the PSU banks are falling over their own feet in their haste to unroll specialised loans, the private banks have gone the personal loan way, big guns blazing.

 This one product covers the entire spectrum of needs from financing a wedding to buying a designer dress to renovating a home. Just a decade ago, it would have been a challenge to get a bank to sanction a loan without a security, without a guarantor and no questions asked. No longer. With competition heating up, this has become the bloodiest battlefield in the consumer finance domain.

The good news is that all you need by way of documentation before you can get your hands on that money is essentially some proof of identity, proof of residence, bank statement for the last six months, last salary slip showing all deductions or a current salary certificate with the last Form 16.  For some banks, even one of the above will do.

The procedure may be short and easy but being eligible for such loans is definitely not. Since the USP of this loan is that it does not require any security, banks are actually betting blindly on you. Hence, expect stringent eligibility criteria. For starters, most banks will scrutinise th  company you work for. If they haven’t heard of it or it sounds remotely suspicious, their “loans at the sole discretion of the bank” clause comes into play.

 Once you pss this first hurdle, you have to meet the criterion of a minimum number of years of employment (at least a year for salaried professionals and three years for the self employed). Some banks decree you need to have occupied your current residence for at least six months, others settle for you having a banking relationship with a bank— preferably the one you have approached for the loan—for a minimum of six months. Then comes the salary. Most banks, especially the private ones, insist on a take home salary of Rs 7,000-8,000 just to qualify.  Do you have what it takes?

FIVE TIPS TO MAKE MOST OF PERSONAL LOANS

Don’t opt for long tenures just for convenience, particularly if your income can service the loan in a shorter duration

If the bank is not willing to give you the amount you need, try clubbing your spouse’s income along with yours to avail of a higher amount

If you have taken two loans, repay the one with a higher rate of interest on it first. You can always opt to increase the tenure of the easier loan

Understand the various charges applicable on the loan—you don’t want to be caught unawares

Take the time to correctly estimate the amount of obligation.Never over-leverage just because the loan is being readily offered on “cool” terms

Assuming you do, and the money is just a signature away, stop for a moment to consider the not-so-good aspects of the personal loan. When you apply for the loan, factor in costs such as processing fees, documentation, insurance and legal charges, loan cancellation or rebooking fees and so on. With the processing fees alone going up to 2.25% of the loan amount, these costs add up to a significant chunk. And should you be late in paying an EMI, be prepared to pay through your nose. Most private banks charge about 24% per annum on the amount outstanding from the date of default. Separate penalties are imposed for bounced cheques and pre-payment of the loan. 

You may wonder whether it is better to go for a personal loan or opt for a specialised loan catering exclusively for your objective. For instance, if you need money to buy a diamond set, will a specific jewellery loan be better than the ubiquitous personal loan? There is no one correct answer. PSU banks offer several specialised loans, sometimes at lower rates of interest than a personal loan. But the paperwork involved is much more than that for the private banks. Furthermore, as Rajeev Yadav, business leader, personal loans, GE Money says, “Most specialised loans are just a marketing strategy to position the product better in the market. We don’t think these niche areas like travel warrant separate marketing since the market for it is not big enough.”

The big question of course is the rate of interest. Personal loans are among the most expensive products offered by banks. According to bank heads, the differential between an asset-backed loan and an unsecured loan is a minimum of 5% to cover the additional risk. The interest rate
depends on factors like your repayment capacity, credit record, stability of income, even the profile of your employer if you are salaried. If a person works for a large established company, he will be offered a lower rate of interest compared with someone who works for an obscure establishment. Check if the rate cited is a flat rate or a reducing one. In the latter, interest is calculated on the outstanding loan amount, which comes down as you pay the EMIs.

The bottomline? Playing hard to get is not a bad thing at all.