To help people tide over any cash crunch during the COVID-19 pandemic, banks and non-banking finance companies (NBFCs) have rolled out personal loan schemes with relaxed norms for their customers.
Should you then opt for a personal loan to ease your short-term financial pain?
Conditions apply
Banks have laid out conditions on who would be eligible for this loan product. For instance, Bank of Maharashtra offers it only to its existing housing loan customers. If you are a salaried person, the loan amount allowed will be 10 times your latest gross monthly salary. In case you are self-employed, then you will get a loan of up to 60 per cent of your latest annual income based on the latest tax filings. The maximum loan amount is capped at Rs 3 lakh for both salaried and self-employed home loan customers.
Bank of Baroda offers its own version of COVID-19 personal loan to its home, car, personal, education and other loan customers. Borrowers should have a minimum of six months’ relationship with the bank. And the existing loan amount should have been fully disbursed to the borrower before applying for the COVID-19 product. If the original loan has a moratorium, then the moratorium period should also have been completed. And, at least three instalments of the original loan must have been paid before the borrower applies for the COVID-19 loan. A good past track record in repaying loans is crucial to be eligible.
Raj Khosla, Managing Director and Founder, MyMoneyMantra says, “Banks are restricting these personal loan schemes to existing loan customers because they know the credit history of the borrower before sanctioning them.”
Bank of Maharashtra allows three years to repay the loan, including a moratorium period of six months. IIFL Finance offers a ‘COVID-19 Emergency Loan’ for nine months, which includes three months of moratorium and six months for repayment. Sumit Bali, CEO and Executive Director, IIFL Finance says, “We are giving a moratorium on the loan so that our customers will get sufficient time to get back into routine business / work after the lockdown is lifted. This moratorium period will help to re-build the income flow before the repayment of the EMIs.”
Keeping in mind the nationwide lockdown, all the banks and firms offering COVID-19 personal loan schemes allow you to apply online.
What works
Interest rates on COVID-19 loans are lower than on the usual personal loans; they start at around 7.25 per cent yearly and go up to as high as 14 per cent annually. Regular personal loans come at interest rates of 14-24 per cent depending on your credit score and income.
“These schemes are offered purposely at low interest rates to help many customers whose cash flows may have got impacted due to the lockdown imposed by the government,” says Gaurav Gupta, Co-founder and CEO of MyLoanCare.in.
What doesn’t work
The COVID-19 personal loan schemes are only offered to existing customers of banks. In fact, some banks offer it only to their home loan customers. Some have extended it to other bank customers as well.
Says Khosla, “Banks will mainly lend only to customers who have a decent track record of repayments and good credit score.” Also, there are various terms and conditions for eligibility and the disbursal amount in the scheme as explained above.
Banks have linked the interest rate of this loan scheme to repo rates of the Reserve Bank of India (RBI). So, when the repo-rate is increased by the RBI the monthly instalment for the borrower will also increase, effective from the subsequent reset date of the bank during the tenure of the loan.
Some of the banks are offering a moratorium of three to six months in this loan scheme. It means a borrower doesn’t have to repay any instalment on during the moratorium period. Khosla points out, “During the moratorium, interest is charged and is added to the repayment costs of the borrower.”
There are penalty charges of two per cent for non-payment or delayed payment on the outstanding amount. This will be an additional cost if you are unable to repay by the due date.
Should you opt for it?
A personal loan should be your last resort. If you are in a tight financial situation, first try and tap your emergency corpus if you have one. If you don’t, then liquidate your existing investments or even your gold holdings.
Do not opt for these loans just because they are easily available online and carry low interest rates compared to regular personal loan schemes.
Taking on an additional loan to pay off your existing loan can lead to a financial disaster, especially in these times of salary and job cuts.
Khosla advises, “At this time, be frugal and control your expenses. No one knows how long this contagion is going to last and what shape it will take. Only if it’s a dire emergency should you opt for this loan.”
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