Eyeing a new sedan? Or pining for a vacation in Bali? Or planning a big fat Indian wedding for your one and only offspring? No matter if you’re short of funds; if you crave something that needs to be paid for, there’s always a financial solution for it – a loan.
There’s a wide range of loan schemes on offer in the market from multiple lenders; all you need to do is choose one that’s right for you. But before you apply for a loan, you need to consider the following points:
- Loan purpose
- Your eligibility
- Lender/interest rates
- Associated fees
- Loan tenure
- Repayment plan
If the loan is to fund your travel to a foreign destination or to conduct a wedding, an unsecured personal loan can be the answer. These are given without the lender demanding any collateral as security. If the loan is to invest in a house or apartment, banks usually sanction up to 80% of the property value, but do bear in mind that this is by no means set in stone.
If you are considering buying a new car, or even a used one, an auto loan is a convenient way to acquire it without having to dip into your savings. Car loans have a lower rate of interest than unsecured loans since the vehicle is used as collateral – unless of course it has been in use for a certain period, usually seven years.
The amount sanctioned by the lender hinges on your past repayment record and credit card dues. Lenders also look at your income to ascertain if you are in a position to pay the EMIs from your stated income. Before taking the loan route, you must be clear on the EMI you are willing (or able) to pay each month. This can be a good starting point to check your EMI repayment capacity.
Also keep in mind that the lender will be checking your CIBIL credit score, a figure that could range from 300 and 900. This number is arrived at after considering your credit card bill payment, bank account statements, existing loans or liabilities, loan repayments, and how many times you have applied for a loan till date.
Tip: If you have been checking your maximum loan limit with multiple banks and do not mind paying the processing fee to each of them, you may be seen as ‘credit hungry’ by CIBIL – this could lower your chance of getting a loan.
When it comes to choosing the lender – whether it’s a bank or a non-banking financial company (NBFC) – do not rush in without prior research. If it is a home loan you are looking for, banks usually lend up to 80% of the property cost, so that’s a huge burden off your shoulders.
This does not mean NBFCs cannot be considered; Tata Capital, for instance, offers home loans ranging from Rs 2 lakh to Rs 10 crore on residential properties. It would be a good idea to visit an online financial services provider such as Credit Nation to compare rates, instead of physically visiting several banks to know their terms and conditions.
Point to remember: institutions offer two types of interest rates on loans – fixed and floating. In case of a home loan with a fixed rate of interest, the EMI amount does not change during the tenure of repayment. In the floating option, interest rates change according to market conditions; it has its risks but can prove to be a blessing if rates fall in the near future.
There can be several fees and charges associated with the loan: administrative fee, service charge, early exit charge, prepayment charge, and insurance and withdrawal fees. Get the complete lowdown on the charges you will have to pay once you get the loan; these charges are a percentage of the loan amount actually sanctioned to you, and not on what you actually take home. Make sure you consider these fees to avoid unnecessary and unexpected expenses.
The length of your loan term or tenure will determine the repayment amount and the amount of interest you will have to pay; please note that the EMI amount is inversely proportional to loan tenure. If you repay your loan over a long period the EMI amount will be low, and vice versa. Most personal loans span 1-7 years, so think it through before you finalise anything.
This is an obvious point but crucial in deciding your EMI amount; a lot of people decide to pay off the loan before the term ends – if the early exit fee suits them – to get out of debt sooner. In that case one needs to decide on the right loan plan and lender to avoid unnecessary costs.
An NBFC operating in both the public and private sector is similar to a bank in the sense that it is also a key financial intermediary, and offers its customers services similar to that of a bank. However, it does not hold a banking licence and therefore, unlike a bank, it cannot issue self-drawn cheques and demand drafts.
One may then ask, what is the reason to have NBFCs at all? It is simply this: banks alone cannot cater to all sections of society; someone has to fill in, given that finance is a basic requirement for individuals and businesses. This is where NBFCs are relevant; they complement banks in providing finance to people. So if you are thinking of taking a loan from a financial institution, you may consider an NBFC as well.
A point to note is the cost of funding, an area where banks score over NBFCs. This is because banks are flush with funds through current accounts and savings accounts on which they offer a low rate of interest, which by extension allows them to lend cheaply. NBFCs find it difficult to offer matching rates, and charge interest rates that are generally higher than that of banks. To stay competitive, NBFCs have to score elsewhere. Let us consider these factors:
- Flexibility: One way for NBFCs to compete with banks is by being more flexible in their lending. You may be considered for a loan amount higher than what a bank might agree to, even if you fail to produce one or two minor documents. Banks may charge a lower rate of interest, but they can be very particular.
- Quick processing: Which brings us to speed of processing – NBFCs take less time than banks to process a loan application, and it is transparent as well. Processing time at banks can range from a few weeks to a few months.
- Unsecured loans: Based on your creditworthiness, many NBFC credit products may waive collateral, but you must check with them first.
- Better services: As part of being flexible, NBFCs have become very customer-friendly; they are highly approachable and they communicate regularly with their customers – not only before the loan is taken but during the loan tenure as well. They also collect repayment in cash or cheque from the customer’s location.
- Wide network: NBFCs have a well-established network across the country, and their services are available in tier II and tier III cities as well.
- Less fussy: It may have happened that you missed a few credit card payments due to an exigency at home, which could affect your CIBIL score. Banks may look askance at this but NBFCs are less fussy.
The Tata advantage
One negative with NBFCs is that this sector is unregulated. Because of this, it is essential that you must look for a renowned name if you decide to take the NBFC route. In India’s business landscape, no name is more credible than the House of Tata. It is synonymous with trust and integrity, and something you can repose your faith in blindly.
Valuing this market perception, Tata Capital – the finance arm of the Tata Group – seeks to bring the trust and expertise of the Group to financial services. With 100 branches and more on the way, the company operates across various areas of business, including consumer loans (home loans, personal loans, used car loans) and business loans.
So if you’re looking for a loan to finance a dream, your search can end with Tata Capital.