These are some basics that you should know when obtaining a personal loan. These days, securing a loan is easy. Repayment is the tough bit. When you don’t repay on time, the recovery agent may come knocking at your door. When getting a personal loan it is important to ask yourself ‘Will I be able to pay it off?’

Personal loans are the one of the most widely chosen options, in case you are in a spot and need some urgent cash. However, personal loans are tricky and you need to know as much as possible about their basics before applying for one. Let’s start with some common questions.

What is a personal loan?

Personal loan is credit that is granted to the borrower for personal use. These loans are usually unsecured (no security or collateral required/asked) and is based solely on the borrower’s integrity and ability to pay.

Who is eligible for a personal loan?

The eligibility criteria and their specific details may differ from banks to bank based on their perception of the risks associated with given out personal loans. However, nearly all banks divide the potential borrowers into three categories:

• Salaried individuals
• Self employed individuals
• Self employed professionals

Other factors which are taken into consideration are, age, residence, work experience, repayment capacity, past obligations and place of work.

What kinds of interest rates are offered on personal loans?

Personal loans are offered in:

• Fixed rate
• Floating rate
• Flat rate

Of the three, flat rates turn out to be the most expensive since the other two are calculated on a reducing balance basis.

What is the average interest rate for personal loans?

The interest rate for a personal loan is decided on the basis of your credit repayment capability and history. Depending on this, interest rates could be anywhere between 14% and 25%, depending on the financial institution.

What documents are required for personal loans?

Personal loans require the least number of documents, making it the fastest to be approved. Typically, financial institutions would require proof of identity, residence, income and also 3 to 6 months of your bank statements. Some banks also require guarantors and the same set of their documents.

How is a personal loan repaid? Is prepayment of a loan possible?

Normally, personal loans are offered between 1 to 5 years. The loan is repaid with Equal Monthly Instalments (EMIs). Prepayment is possible but will generally carry a significant prepayment charge.

How is a personal loan different from credit card cash advances and loan against property?

Personal Loan	Credit card Cash Advance	Loan Against Property
Unsecured loan	Unsecured Loan	Secured Loan
Between 15% and 25%	For rollover credit (amount allowed to be rolled over and paid later) interest can go up to 35%	Between 12% and 15.75%
EMIs are higher because of high interest rate	Minimum monthly payments can be made. However, the interest keeps on adding up	Since the rate of interest is lower, frequently LAP Equated Monthly Installments (EMI) turns out cheaper
Maximum loan eligibility is determined primarily by an individual’s income	Maximum amount is determined primarily by the credit limit on the card	Maximum loan eligibility is determined primarily by the value of the property and income
Tenure between 1 to 5 years	Can be paid off monthly	Tenure maximum of 15 years

These are some basics that you should know when obtaining a personal loan. These days, securing a loan is easy. Repayment is the tough bit. When you don’t repay on time, the recovery agent may come knocking at your door.

When getting a personal loan it is important to ask yourself ‘Will I be able to pay it off?’ Some things which can help you pay back your personal loans are:

• Pay off your credit cards: Try to pay off your credit cards as soon as possible, since credit card debts inadvertently hamper loan payments.

• Budget your spending: Once you have taken a loan, ensure that you budget your spending, so that if in any unforeseen circumstance you cannot make a monthly payment, your savings will help you out.

Personal loans if not utilized and repaid properly, can become a curse in disguise. Make your decisions prudently to ensure a safe financial future

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Also Read:

• Things to remember about your personal loan!
  
• Why LAP is a better option than a personal loan?!
  
• More articles

Try to lower your interest rate. Negotiate with your bank. One other way is to convert your credit card debt into a personal loan debt. It will definitely be lesser than the credit card interest rate. Calculate your net worth and see if any of your investments could help you prepay a part of your loans.

Akash was an IT employee who was well settled in his career. With a take home that more than met his needs, Akash decided to invest in his future. Let us see how he managed his finances. He applied for a car loan and a home loan. The car was worth Rs.10 L, a bit of an indulgence but then he had always wanted to own the brand. He then invested in a premium  upmarket 5-bedroom apartment. His spouse Sheela tried suggesting that they should not be so extravagant but to no avail.

She had recently given up her job to take a break and spend more time with her one year old child. With no bulk savings for the immediate future she was worried about the manner in which Akash was spending the sole income they had. To top it off he invested all the money that remained from spending on the EMIs and  his monthly expenses, in stocks. This was the year 2007. They were managing fine till Akash’s stocks started tumbling in 2008. Instead of choosing another avenue, Akash started buying more stocks as they were cheaper during this period. The real shocker came when Akash was laid off when the global recession hit and his company had to cut back on resources to counter the effects.

How did Akash cope? How did he manage to pay his EMIs?

Akash did one smart thing though. He decided to approach a debt counseling centre for his financial hassles. They showed him the right way to manage his finances. They also mediated between him and his bank.

Luckily for him Sheela had an ancestral home back in her home town, which was bequeathed to her. She also had some fixed deposits and some gold that she had invested her savings in when she had an income. Based on the debt counselors’ advice, she obtained a loan against her property. She then helped Akash pay  a portion of the money towards his home loan and another portion towards his car loan as part prepayment. He also obtained written consent from the bank that he would resume repaying his loan once he got a job. In such situations banks do oblige you if you manage to repay most of the money or part of the money if not all as it was a better deal than no money at all.

Sheela whose industry was not so badly hit by the recession went back to  her old job while Akash took a break and got to spend more time with his son. Fortunately for him, his peace of mind was restored thanks to Sheela’s timely aid and the debt counselors’ help.

Six months later he managed to land a good job with a reasonably good pay, though about 20% lesser than his previous pay. He resumed his EMI payments and as banks were slashing interest rates he again negotiated with his bank for a lower interest rate. As it timed with the pressure from RBI on banks for lowering interest rates for existing borrowers also, he managed to come to an understanding with his bank. Agreed, not all can get as lucky as Akash. It was a pretty close brush with fate for him and he could have fallen in a abyss of debt! Yes…he got very very lucky indeed.

However, Akash learnt a valuable lesson for life. He started following simple but smart methods to avert a future disaster.

a. He put aside three months of his pay into a separate account meant to serve as an emergency fund. He planned to put aside 3 more months of pay into that account.

b. He ensured that his current EMI did not exceed 40% of his current income. He manage prepay his home loan at regular intervals to bring this under control.

c. He with the help of Sheela managed to keep his monthly expenses including his loans within 60% of his income and put aside the rest as savings and investment

d. When he invested now he took care to diversify his portfolio and not stick to equities alone to survive a future stock market crash.

Here are some suggestions if you are stuck in debt and do not know how to cope.

- Try to lower your interest rate. Negotiate with your bank. One other way is to convert your credit card debt into a personal loan debt. It will definitely be lesser than the credit card interest rate.

- Calculate your net worth and see if any of your investments could help you prepay a part of your loans.

- Make a contingency plan for the immediate future. Talk to your bank along with your debt counselors and explain your situation and see if you can resume your loan at a later date but do make an effort to prepay some amount.

- If it is a double income household try and see if your spouse can support you in the event of a job loss in the short term before you land a job, in case you are suffering from a lay off.

- Manage your current finances judiciously to battle through the current situation and emerge wiser.

Photo credits: familymwr

In case of housing loans, banks have a provision for restructuring the loan e.g. terms of extending the tenure of the loan. For the same, the bank must perceive the reason of default to be genuine. The Reserve Bank of India (RBI) has issued guidelines on the same. For. e.g. the loan tenure can be increased by not more than 1 year in most cases. Foreclosure by selling the collaterals with the borrower’s co-operation is also advised as the next step.

Owning a house or a car is a dream come true for many because of the availability of loans. In the last few years with an increase in standard of living particularly in the metros, the once conservative and loan averse investor is now willing take on loan commitments to satisfy even leisure requirements.

Taking a loan has an impact on your cash flows by way of EMI payments. What happens to all your loan commitments, if you have lost your job or are entangled in a debt trap because of too many commitments?  Default becomes imminent. A default occurs when a customer repeatedly fails to make payments to the lender as per the schedule outlined by the lender at the time of giving the loan.

Does a default mean that you need to give up ownership of the asset for which the loan was taken?

When you find that you are in a situation where you will not be able to meet your loan obligations, running away from the lender is the last thing you should do. Banks/lending institutions understand that there could be genuine reasons for which the borrower is unable to make timely payments such as loss of job, or an accident that may have confined the borrower to the bed. This is especially true if you have always paid your EMIs on time, every time before events took an unfortunate turn.

You need to engage in a dialogue with the bank/financial institution. Based on how genuine your intent and case is, the bank may look for various feasible solutions that is mutually acceptable. The borrower will benefit because he will be able to retain his asset and the bank will also benefit because this agreement will prevent an addition to its NPA portfolio.

The various options that can be worked out include:

• Reschedule your debt: After having analyzed your financial position, if the bank feels that the quantum of EMI is what is troubling you, they may be willing to reschedule your debt by extending the loan tenure. That will bring down the monthly EMI commitment, though it will mean more interest outgo in the long term. However, you should consider the immediate relief it can bring to your current situation. When the tide turns and you are facing better times you can try negotiating with your bank and revert to your old or higher EMI or even prepay your loan, closing it early and saving excessive interest outgo if it makes sense post the pre-payment penalty.

• Deferring the payment: If your financial situation is such that there is likely to be a jump in cash flow going forward because of change in job or any other reason, you may seek temporary relief from the bank for a few months. The bank may permit the same but may charge penalty for not paying within the time frames agreed upon earlier.

• Restructuring the loan: In case of housing loans, banks have a provision for restructuring the loan e.g. terms of extending the tenure of the loan. For the same, the bank must perceive the reason of default to be genuine. The Reserve Bank of India (RBI) has issued guidelines on the same. For. e.g. the loan tenure can be increased by not more than 1 year in most cases. Foreclosure by selling the collaterals with the borrower’s co-operation is also advised as the next step.

• One time settlement: If you express your desire to pay back, and make known to the bank your current financial condition, banks may be willing to enter into a one time settlement on a case to case basis. This is a good way to get rid of your loan if you have some money as usually the settlement will be done at a lesser value i.e. the bank may waive off some amount/charges. If your financial situation is really bad, then you may need to file for bankruptcy to free yourself from the loan commitment.

• Conversion of loan in case of unsecured loans: Banks tend to be stricter as far as unsecured loans are concerned. The borrower could opt for converting the unsecured loan to a secured one by offering a security. That should bring down the rate of interest and thus the EMI burden.

Running away from the problem is not the solution. Not only will you undergo emotional stress, you will also end up losing your asset. What is important is that your intent to pay off the loan should be evident to the lender. It is in the banks interest too, to ensure that the loan doesn’t turn bad. So be wise and engage in a dialogue with the bank the moment you figure out that you will not be able to meet obligations and don’t wait till the last moment. That should help you tide over the temporary crisis you could find yourself in.

What happens if none of the above options work out?

If none of the above options work, the bank after giving you time for repayment will go in for repossession of the asset for the purpose of recovery of dues.

Movable asset (Car/Auto)

• Borrower will be given a notice of 7-15 days to pay the dues before the repossession of the Vehicle. In case of non payment within this notice period, the Bank will repossess the pledged vehicle..
• After repossession of the vehicle, a Pre-Sale Notice would be issued to the borrower giving him a time line of 7 days to make payment of the outstanding dues. The Pre Sale Notice would clearly mention the details of the concerned office and the corresponding contact person for payment and release of vehicle.
• In case the borrower makes the payment in accordance with the agreed terms of settlement, the vehicle will be released back to the borrower within 7 days from the realization of the payment.
• The vehicle will be sold by way of auction through dealers empaneled with the bank within 90 days from the date of repossession.

Immovable Asset (House/property/land)

A notice will be sent to the borrower u/s 13(2) of the SARFAESI Act. This can be done only after the loan is classified as NPA as per the guidelines set by RBI

• The customer will be allowed 60 days post issuance of the notice to regularize the account or come forward to settle the account. .
• If the borrower refuses to pay, then the authorized officer will ask for the physical possession of the mortgaged property by handing over the demand possession notice to the borrower
• The Bank shall proceed with the auction of the attached property post 30 days of taking possession of the property, in the event, that the customer does not come forward and settle the loan. The Bank shall send the customer a letter intimating him, of the venue of the sale indicating date and time of the same.
• The bank will consider handing over possession of property to the borrower any time after repossession and before concluding sale transaction of the property, provided the bank dues are cleared in full.

Any excess amount obtained after adjusting the dues on the loan will be refunded to the borrower.

Borrower’s rights

The SARFAESI act gives the customer the right to appeal against the action of repossession taken by the bank in the Debt Recovery Tribunal u/s 17 within 45 days from the date when the action was taken. If the DRT passes an order against the borrower, then an appeal can be filed before the Appellate Tribunal within 30 days of receiving it. If it is held in appeal that the possession of the asset taken by the secured creditor was wrongful, the Tribunal or the Appellate Tribunal may direct its return to the borrower, along with appropriate compensation and cost.

Loan default can have serious consequences. Not only could it result in seizure and auction of your assets, but your credit score too will take a beating. Even rescheduling debt tarnishes your credit history to an extent and will reflect in your credit score. Obtaining a loan in the future will become an issue which is a huge financial setback. Make sure you take a loan only if you’re sure of timely repayment. A good way to do this is to ascertain your personal net worth in terms of assets you own and the money you have at your disposal after taking stock of your existing debts and other financial commitments.

A pre approved personal/home/car loan is usually offered by banks to people who have a clean track record of loan repayment history, like in my case. You get it even if you had pre closed your earlier loan amount. Some banks pre approve a loan to its own customers even if they had not taken a loan at all based on certain conditions like the cash inflow and transactions in their salary accounts or the repayment track in case of credit card holders. However, in both cases pre approved loan offers often come with a time limit to accept them.

Rahul recently got a pre-approved loan. He shares his experience with us.

” Last week I got a call from my bank informing me that I have been pre approved a personal loan for Rs 2, 00,000! What?! Only recently I had successfully paid off a personal loan for 2 years! And this pre-approved loan will be at a lower rate of interest and will be disbursed within the next 48 hours. And all I required was resubmit some documents. Perfect and simple! Or is it?

I am sure I am not alone here. Most of us out there at some point had similar calls from your banks! But should we jump when such an offer is made to us? Or is there anything else that we need to check before taking it up? I decided to find out. I rang up my financial consultant and he said that there are several points to be considered before taking up a pre-approved loan.

What is a pre approved loan, eligibility and types of pre approved loans

A pre approved personal/home/car loan is usually offered by banks to people who have a clean track record of loan repayment history, like in my case. You get it even if you had pre closed your earlier loan amount. Some banks pre approve a loan to its own customers even if they had not taken a loan at all based on certain conditions like the cash inflow and transactions in their salary accounts or the repayment track in case of credit card holders. However, in both cases pre approved loan offers often come with a time limit to accept them.

There are two types of pre approved loans: unsecured and secured. Unsecured pre approved loans comprises of mainly personal loans and credit cards while the secured ones are the car loans, and even home loans.

So what you need to know if you get a pre approved loan offer from your bank?

Do you need it?

First ask yourself if you really need the loan at all. There are times when people take the loan just because it was offered to them when in reality there was no necessity. Avoid a loan if you do not have a really pressing situation ahead of you! Remember, every loan pre approved or not comes with a cost. And at the end of the day it is you who will have to bear it.

Why a pre approved loan is good!

Generally, the time taken for processing of pre approved loans is much less thus reducing the risks of you missing out on the chances of getting that new car or your dream house. In-principle approvals for home loans from banks are a boon to people who have not identified a property yet. This will let the customer know how much the bank will give him and search for a property accordingly.

Decide the right loan amount for you!

If you decide to take up the pre approved loan the next thing to decide the exact loan amount you would need. Usually, the banks decide the pre approved loan amount based on your previous loan repayment records or your account balance, transactions and credit card transactions. And here you are in a better negotiating position. Having said that it becomes all the more important for you to decide on the loan amount based only on your requirements and not simply for the reason it is being offered to you.

Check the interest rates!

In the case of pre approved loans the interest rates will be slightly lesser than the rate of interest offered to other customers like in my case. My bank offered me an interest rate that was 2% less than what was offered to other customers. However, this alone does not qualify for taking up the loan. There could be other banks out there that offer the same loan amount for a cheaper 16-18%. So it is important to check the loan offers from other banks before signing on the dotted lines.

It is also important to clarify with the bank about the nature of the interest, particularly for home loans, whether it is fixed or floating.

You would still need the documents anyway!

Often, the conditions for a pre-approved loan are more or less the same for a loan you may approach your bank for. Even for pre approved loans banks might require some documents except in the case of some in house bank customers and require the prior checks in case of home and car loans. Sometimes even a small discrepancy in the documents could be enough reason to cancel the pre approved loan.

So the next time you get a mail from banks about a pre approved loan remember to look for the above details. After all, it is your money!”

The key to getting the best rate for a personal loan is by maintaining a clean credit history. Your credit history is recorded by the credit bureau (CIBIL) which in turn gives you a credit score. This is shared with banks. Banks will use this as the key parameter for determining the rate of interest on your loan and whether a loan should be provided to you in the first place or not. Good repayment track record will not only ensure quick approval but also lower rate of interest.

When should one opt for a personal loan?

By virtue of it being an unsecured loan, personal loans have a very high rate of interest attached to it. So one should consider taking a personal loan if and only if

- You do not have an asset/security against which you can get a loan. For e.g. if you have a property which is not already a security for a home loan, you can get a loan against property

- You have some visibility on your cash flows and are sure that you will be able to repay the EMIs in time. Else you are bound to enter into a debt trap.

- There is an emergency and you need funds immediately. A personal loan can be taken because the processing time is much lesser on account of minimal documentation.

Opt for personal loans only to meet your essential needs which cannot wait. It should be your last resort (before considering withdrawing cash on your credit card). Taking a personal loan for satisfying leisure needs can prove to be costly i.e. for gambling, buying a new car etc.

What factors will determine your total loan cost?

Interest rate is not the only cost associated to the product. Several charges can be levied which will affect the overall cost of the loan. Hence, rate of interest should not be the only parameter considered while comparing this product across banks. Some of the charges levied include

- Processing Fee: This is charged from the borrower to process the loan application. It is typically between 1% and 2 % of the loan amount. Some banks charge a flat fee. This fee is to be paid up front with the loan application and supporting documents.

- Pre-payment Fee: If the EMIs are paid before the tenure, banks will normally charge the borrowers a pre-payment fee which will be in the range of 2% and 5% of the outstanding loan amount. Usually, pre-payment is permitted only after a certain period of the loan disbursal.

- Late payment penalties: If there is a delay in paying off the monthly EMIs, banks will levy a late payment fee with the EMI. It usually is in the range of 2% and 3%.

- Cheque bounce charges: If you have given post dated cheques and it is not honoured by your bank on account of insufficient funds, you will be charged a penalty for cheque bouncing. Banks charge anywhere between Rs. 250 and Rs. 500 for the same.

- Documentation charges: These are the charges for verifying the borrower’s documents to processing the loan application. Most banks employ a third party vendor to do the same. Charges are anywhere between Rs. 500 and Rs. 1,000.

How to select the best personal loan offer?

For selection of a personal loan that will offer you maximum benefits, consider the following factors

- Rate of interest: This will differ from bank to bank depending on their assessment of your risk profile. Factor in your total interest outgo while comparing the total cost of the loan offer between banks.

- Other charges: As is stated above, there are several charges levied by the bank which will have an impact on the total cost for you. Hence, let not interest rate be the only factor you consider from the cost angle. Take the total cost into consideration.

- Amount of loan: Check if the bank is providing you a loan sufficient enough to meet your financial needs.

- Tenure and EMIs: If it is a shorter duration loan, the EMIs will be higher and vice versa. So if you feel you will not have sufficient funds to pay off high EMIs initially, then this factor will be important too. On the other hand a shorter tenure might help you close the loan early at a lesser interest outgo. So take a stand, depending on your monthly budget.

Take all the above parameters into consideration before selecting the bank from which you will take the personal loan

How to ensure that you get the best possible rate on a personal loan?

- Keep a tab on your credit score: The key to getting the best rate for a personal loan is by maintaining a clean credit history. Your credit history is recorded by the credit bureau (CIBIL) which in turn gives you a credit score. This is shared with banks. Banks will use this as the key parameter for determining the rate of interest on your loan and whether a loan should be provided to you in the first place or not. Good repayment track record will not only ensure quick approval but also lower rate of interest.

- Use your existing relationship with the bank: Banks tend to extend relationship privileges to existing customers in order to retain customer loyalty. So they may waive off or reduce the processing fee, documentation charges and may offer you a better interest rate than that offered to a non banking customers.

If you’re stuck with a personal loan and are not able to meet the EMI commitments, what should you do?

Try to convert the personal loan which is an unsecured loan to a secured loan against assets such as a house, car, mutual funds, RBI bonds, gold, bank FDs, life insurance policy, shares and debentures by asking the bank to restructure your loan. Make sure that the EMIs are reduced for an amount comfortable for you to make payments at an interest rate of a secured loan.

If you feel that you’re not getting an advantage enough for converting the personal loan into a secured loan, you can separately pledge the assets you have and obtain a loan against them and then with that loan amount, pay-off your personal loan.

More often than not many of us consider a personal loan as the best option to meet contingencies. Opting for a personal loan without studying its terms and conditions and services could cost you more than what you intended!

If you are stuck in a personal loan debt, here are some ways to free yourself:

Asset monetization

If you have one or more of these assets such as car, home, life insurance policies, tax saving certificates, shares, bonds and debentures, or gold jewelry, bank fixed deposits, or mutual funds, you could monetize them to pay off your debt. In fact, some banks offer loan against assets that carry a lower rate of interest which could be used to settle your personal loan.

Consider debt consolidation

Another effective way of dealing with your debts is through what is called debt consolidation. In this method, you could pay a relatively lower installment every month over a longer tenure to the lender who will combine all the components of your debt portfolio into one. Debt consolidation is an effective option if you have too many loans to take care of and not enough monetary capacity for astute financing as this method will give you a built-in view of your credit worthiness. Though beware that when you calculate the total loan cost in the long run, it might become expensive. However, the idea is to obtain a short term relief under the current circumstances. Once your finances improve aim to close the loan earlier than planned.

Top up or convert to a secured loan

If you had taken a home loan you can move to a lower cost credit by going for a top up on your current loan. Another viable option would be to talk to your bank and if they agree convert the current loan into a secured loan against your vehicles, house, but only if the property is free from debts, liens or mortgages. This way you can restructure the loan for a lower monthly payment after taking into consideration the loan tenure and the interest rate.

Perhaps, the only drawback in converting a personal loan into other loans having collateral is that you stand to lose the collateral at risk in case of default on your loan amount, which could mean a lot when there is a contingency in the future. Hence, it is advisable to convert your current debt into a secured loan only after analyzing your capacity to repay the secured loan so that you don’t stand to lose the collateral at risk.

Remember that even a single default on your personal loan could trigger unexpected after effects in the repayment of your current loan and getting a future loan. In cases of the first default, it is ideal for you to talk to your lender and find a way out. Under normal circumstances the lender could impose a penalty of roughly around 2% on the default amount, which will only add to your current burden! So strive to discuss any problems you face with the lender to seek advise on possible solutions.

A personal loan is always a risky alternative finance with a higher rate of interest and it is better to close the loan as early as possible.

Evaluate other options before you take up a personal loan

In a case of any eventuality you could try the other time tested avenues of finding emergency funds. Monetizing your assets, or selling off your shares, bonds or debentures or premature closing of your fixed deposit could help! If you are a salaried individual the best way to get funds to meet a contingency is to approach the bank where your salary credit is done. Having known your track record and your exact income and withdrawal transactions, the banks are the best option available for you to secure a loan. The rate of interest could be relatively lower for you, as you bank with them. The same option holds good for any businessman having a current/savings account with a bank.

You should opt for a personal loan only if you do not have any assets to monetize or other options don’t work for you as interest rates are the highest next to only credit cards!

There are several private investors who fund business projects. They broadly fall under three main categories – angel investors, venture capitalists and private equity funding. At an early stage of entrepreneurship venture, it’s best to approach an angel investor.

Query: Am working in an IT company as a senior associate. I’m interested in opening a restaurant. I already have prior experience in the hospitality industry but the problem is I do not have financial backup. I want to know:

1. Is there any way to raise capital?

2. Should I take a loan? If yes, what type of loan?

If you are keen on starting your own business you could explore a few options mentioned below that will help you realise your dream.

a. Approach a private investor

There are several private investors who fund business projects. They broadly fall under three main categories – angel investors, venture capitalists and private equity funding. At an early stage of entrepreneurship venture, it’s best to approach an angel investor. It could be any individual with surplus funds – a retired professor, a finance banker or someone well established from the same hotel industry. In fact approaching someone from the same industry can be a big help as they could don the role of a mentor and provide valuable expertise for establishing your business.

At a later stage, when your company has started off and has a good business model in place you could try for a second round of funding from venture capitalists.

The third option is private equity. This is usually opted for high risk and high growth sectors. This comes at a much later stage of an establishment’s growth.

b. Loan against property

You could also obtain a Loan Against Property (LAP); but for that you will have to pledge your property. The loan amount you can avail depends on the value of the property. This can range anywhere between Rs 1 lakh to 3 crore.

Your loan tenure can be as long as 15 years with interest rate between 12-14 per cent. The only downside is that it comes with the risk of giving up your property in case you are unable to repay the loan amount.

c. Apply for a business loan

Banks do offer business loans specifically for such business plans. You can avail from Rs 5 lakh to Rs 35 lakh with interest rates ranging between 12 to 15 per cent. However, this figure varies from bank to bank. Also some banks ask for collateral security if the amount exceeds a certain limit.

If you have made any investments in the form of deposits, insurance policies, gold etc. you could opt for a loan, pledging these as collateral. But these investments should be in your name. Your loan amount will be sanctioned based on the value of these investments.

Other loan eligibility criteria include income, repayment capacity, loan repayment period etc. You are expected to repay the amount in a maximum period of five years but some banks offer you higher repayment period with wider choice. The repayment mode can be monthly, quarterly or half-yearly. Check with your bank to know more about it.

Once you have identified the fund boxes — Spending forecast, contingency fund for job loss and medical expenses, be dedicated and generate your money flow into these funds consistently. This could be once a quarter but it would be more manageable if it’s once a month.

Do numbers make your head spin? Did you hate math at school? Or perhaps you are just too laid back to worry about planning and wisely remark, “Take each day as it comes, the rest will take care of itself !”

Actually that might be the truth, things seldom happen according to plan. However, if you believe in the power of self-reliance, then you should probably sit up and take notice.

Money is essential for survival and we exchange it for most of our essential and not-so-essential needs, ranging from basic comforts to luxuries that we desire. It would not augur well to wake up one day and realize the coffers are empty and all our resources have run dry!

Let us put away that dreaded thought and focus instead on ways to have access to funds when we need them the most like, for instance, a job-loss or an emergency surgery for a loved one! Here budgeting comes into play.

Planning your budget makes you aware of your financial situation and helps you create a contingency fund to tap into, when in need. So how do you start preparing to put into money consistently into this contingency fund?

Fixed expenses vs. Flexible expenses

Step A: If you are someone used to hard cash and don’t like the idea of a credit or debit card, then you just need to calculate your week’s regular expenses and multiply that into four, to get your monthly outflow.

If you are someone who likes detail (that would be even better) then allocate expenses under different categories like Food, Transport to work, Shopping, Entertainment, etc., and you can further divide the categories into groceries, eating out, etc.

The detailed break up will help you pin-point exactly where you are overspending and take a conscious step to curb those expenses. You should divide these expenses under two broad categories namely Fixed Expenses and Flexible Expenses.

For example, under the fixed expenses your loans, utilities, services availed, etc will be clubbed and flexible expenses could include dining out, entertainment, shopping for clothes, etc.

Spending Forecast Plan

Step B: Chalk out a ‘Spending forecast’ plan. Evaluate what are the things you need to buy in all the five main areas — household, transport, food, entertainment, other needs — and set aside monies for that.

Other needs may include emotional expenses like that snazzy electric guitar you always wanted to buy to cultivate an entertaining hobby, or a wardrobe upgrade, a professional course you were planning, etc.

Contingency Fund-I

Step C: Evaluate a scenario where you may be out of a job, then you need to figure out how much you spend each month and then set aside that money x 6 months as something to fall back on, when fate hands you a raw deal like a lay off. This way you ensure that you can be self reliant and can be prepared for unforeseen emergencies.

Contingency Fund-II

Step D: Set aside some money apart from a medical insurance for any sudden, short term medical expenses you are likely to incur. Keep this cash very accessible and yet be disciplined enough not to dip into it.

Once you have identified the fund boxes — Spending forecast, contingency fund for job loss and medical expenses, be dedicated and generate your money flow into these funds consistently. This could be once a quarter but it would be more manageable if it’s once a month.

Before this final step of dividing the savings, you need to save every month!

If you are like most of us, who notice the funds have run dry just a few days before the paycheck is due to arrive, relax! There is a way around it.

Create another account, which perhaps gives you a good return interest rate on your savings and enable an auto transfer of a percentage of your funds (which takes care of Steps C and D) based on your calculations, on a suitable date of every month to this alternate account.

Keep this parked cash out of your reach and from here invest it in suitable financial instruments, which can be liquidated when the need arises or simply keep it here and let it accumulate interest.

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A long term loan like a home loan is a debt that is part of your budget every month. If you invest too much into it, there might not be adequate funds to manage a huge list of other expenses that will tend to accumulate with time. For eg. You need to make allowances for future expenses like education expenses for children, emergency funds for a job loss or the loss of one income in a situation where two people have taken a joint loan.

Did you ever wonder why your EMI is generally restricted to 30% or 40% of your monthly income? Here is why.Salary details, qualifications, employer/business, years of experience, growth prospects, alternate employment prospects and sources of other income, if any, all are aspects that determine the amount of loan you are eligible for.

Generally, the repayment schedule is worked out in a manner that allows not more than about 40% of your monthly gross income to be repaid as EMI. It is restricted to 30 % or  40% keeping the following factors in mind:

10% of your income is spent on other loans, if you have any or if you avail one in the future.

25% of your income gets deducted by way of statutory deductions and for investment purposes.

25% of your income is generally spent to meet your monthly expenses.

This leaves back 40%, which is taken as your repayment capacity for this loan.

For self-employed applicants, profit is the benchmark that determines loan value. The longer the time frame for repaying the loan the lower the EMI and this also means you can opt for a larger loan amount. The loan amount you are eligible for is also dependent on other factors like the company you are employed with, the location of your residence and your credit history.

A long term loan like a home loan is a debt that is part of your budget every month. If you invest too much into it, there might not be adequate funds to manage a huge list of other expenses that will tend to accumulate with time. For eg. You need to make allowances for future expenses like education expenses for children, emergency funds for a job loss or the loss of one income in a situation where two people have taken a joint loan.

The might be spikes in interest rates. In such a scenario usually banks will increase the loan tenure in order not to put the loan taker in a tight spot by increasing his EMI. In such a scenario if you have  adequate funds in hand you could prepay at intervals, allowing scope for closing your loan early.

Rakesh Sinha is employed with Patni computers. His father, a retired government employee discusses a plan for buying a plot of land that looks promising in his hometown. The only set back for Rakesh’s father was that he was short of Rs. 3 L with the land costing around Rs. 10 L.  Rakesh told his dad to proceed with the purchase and promised to come up with the funds in a couple of days. Rakesh knew he could easily afford a personal loan of Rs.3L with his salary of Rs.8L per annum. He planned to repay the loan in a span of 3 years with an EMI of around Rs.10, 200. Rakesh was very glad that he was able to pitch in to help his father.

In the case of Sanjay Chaudhary the circumstances were different. He had to undergo a heart surgery as a critical life saving measure.  Unfortunately for him, he did not have insurance but his daughter, Srijitha, a chartered accountant employed with Ford came to his rescue and quickly ramped up the funds with a personal loan for Rs. 4 L.

The circumstances under which these personal loans were taken is a good indicator that the bank is not concerned with the end use of the personal loan but only with the individual’s ability to repay.

Why do people opt for a personal loan?

Here is a quick survey done by BankBazaar.com to figure out how personal loans were actually spent by their applicants.

For a family emergency

As evident with some of our loan applicants described above, family emergency seems to top the charts as one of the biggest reasons why people opt for a personal loan. Nearly 37% of personal loans fall in this category.

For repaying borrowed money

One of the typical uses of a personal loan tends to be for repaying small loans borrowed from friends and relatives. Sometimes people also take a sensible decision to repay pending credit card payments through a personal loan, as the interest on a credit card can be much higher than the interest rate on a personal loan. This constitutes around 10% of the loan applicants.

For buying household appliances

Personal loans are also used to buy appliances such as TV, refrigerators, air conditioners etc. This is mainly opted for by people who feel such a purchase will cause a dent in their monthly budgets. Around 16% of the loan applicants opt for this.

For holiday travel

This is one of the emerging areas where personal loans are utilised. This is generally taken by people who have the means but are facing a temporary lock in of funds. This works for around 5% of the loan applicants.

For marriages and functions

People often opt for a personal loan when there are big occasions like marriages or other family functions. Today, marriage parties cost a significant amount of money. About 17% of the loan applicants spend their loans this way.

For the down payment of a home loan

Many individuals opt to take a loan of a couple of lakhs to top up their down payment for a home loan, when they are a few lakhs short of the required amount.  Around 15% of the loan applicants take up this option.

Who takes a personal loan?

From a bank’s perspective, there are two types of borrowers. The former has a high credit risk and hence is given a secured personal loan against some form of security like property, shares, gold etc.  Such loans cease to be strictly personal loans. The latter has a low credit risk and become eligible for an unsecured loan.

It is immediately evident that the salaried class are a perfect match for this low risk category where the default levels are likely to be lower for the banks. In fact, if you are not in full time employment, it will be difficult to get a personal loan.

People who take personal loans are usually in their 20s or 30s. Almost 80% of the loan applicants are in the age group of 25-35 years.  These individuals live in a credit culture where a personal loan, despite high interest rates, is an acceptable form of fulfilling needs and desires.

The size of the loan depends on the place, in other words, based on the average living expenses of a particular city or town. In tier 2 and tier 3 cities, majority of the people opt for a personal loan worth anywhere between Rs.50, 000 to 1 L. In tier-1 cities and metros, the majority of personal loan borrowers opt for sums anywhere between 1 L and 3 L.

Repayment

There was a time in mid 2000s, when banks were more lenient with sanctioning a loan. The conditions were more flexible for disbursing a personal loan. Similar to credit cards in early 2000s, there were several defaults as well on a personal loan.

However, all that has changed drastically. Banks have become strict in lending a personal loan in the past 3-5years. Default levels were in the range of 14% to 17% as recently as 2008. Since the economic meltdown, banks have tightened eligibility norms and the default rate has come down to less than around 10-12% now.

Banks have now become very selective in disbursing a personal loan with employed individuals given the highest priority, as indicated earlier. Added to that if you are an existing customer of the bank you definitely stand to gain a better interest rate as well!