How to tackle high interest on personal loans

For new borrowers, if the higher EMI crosses their repayment threshold, it’s advisable to reassess the loan requirement, and only borrow what is needed.

loan, personal loan, secured loan,
A borrower will now land up paying 0.6 per cent more interest on a 3-year loan.

The demand for personal loans has gone by lately. The recent report by CRIF High Mark (a credit information bureau) states that personal loans saw a 4X growth in originations (volume) from 39.9 lakh accounts in FY19 to 158.1 lakh accounts in FY22.

Gaurav Chopra, CEO and Founder of IndiaLends says, “Borrowers opt for personal loans for various reasons including weddings, travel, business, medical emergencies, etc. However, they should be aware of the ‘Most Important Terms and Conditions’ including interest rate, processing fees, repayment policy, time duration, etc. A borrower must understand and consider the said factors before applying for a personal loan.”

Implications for borrowers: The RBI’s recent move to increase the repo rate by 40 basis points, Chopra says will increase the interest amount on a personal loan. A borrower will now land up paying 0.6 per cent more interest on a 3-year loan.

Tackling high interest: As banks begin to pass on the higher interest rates to customers, hence, experts say it’s important borrowers take fresh stock of their financial position. “In the event, that a customer is unable to afford a higher EMI amount, the borrower can request an increase in tenure. In the event a borrower opted for balloon payments, it would help the borrower 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’s advisable to reassess the loan requirement, and only borrow what is needed. “In no event should the borrower miss or delay their payments, as that can be a double blow of additional charges and poorer credit score,” he further adds.

Here are some other avenues for credit, such as secured loans that typically attract a lower rate of interest, that one can also explore;

Employee Provident Fund (EPFO): A loan applicant who has an EPF account can opt for a loan of up to 90 per cent of the total amount that is deposited.

Public provident fund (PPF): Being a long-term saving instrument by the Government of India, a loan applicant can take a loan against PPF the year after which the account was opened, from the third financial year to the fifth year.

Gold: Chopra points out, “It can be pledged as collateral and be great as an alternative to unsecured personal loans. Interestingly, this is one avenue that doesn’t require a good credit score.” The amount of the loan depends on the amount of gold deposited.

Property: It’s easy to get a loan against any property. Property loans can be availed up to as high as 80 per cent. Note that, with time when the value of the property increases the eligibility also increases.

Fixed Deposit: Fixed deposit accounts can be easily used for getting a loan up to 90 per cent of the FD amount.

Insurance: A loan against the life insurance can be availed by the user but an interest rate of 10.50 per cent to 12.50 per cent is levied.

Mutual Funds: Mutual funds can be used to get a loan. An agreement is made wherein the financier lends the purchased unit.

“While there are multiple alternatives to avail of personal loans, every option has its own set of advantages and disadvantages. The loan applicant needs to understand his/her needs and choose wisely,” concludes Chopra.

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