India’s consumer finance sector is witnessing a churning and the personal loan market is growing at a hectic pace. Despite the growth in lending, banks are unable to satiate the demand for new loans. To cater to this demand, private lenders have rolled out new products to cater to the financial needs of the millennial population.
Consumer loans are mainly unsecured loans which can vary between Rs 1 Lakh to 15 Lakh. Many public sector banks provide loans but their application process is bogged down with red tape. PSU banks like SBI, Canara Bank, Indian Overseas Bank and Oriental Bank of Commerce take almost a week to process and approve your application. It has also become more difficult to get your loan approved because of the rise of NPA’s in Public Sector Banks. Bank Managers are hence extremely cautious in approving new loans because of these developments.
Earlier this year when I required a loan of Rs 3 lakh, I decided to not borrow from government banks and instead opted to go with a private lender.
In India there are four types of private lenders:
1. Private Banks
2. Microfinance Companies (NBFC’s)
3. Local Money Lenders
4. Gold Loan Companies
The local moneylender charges a very high-interest rate. The money lender in my area charged 4% per month which works out to 48% annualized. Most people borrow from a moneylender if they do not have a bank account or a credit history at CIBIL. You will be required to sign a few stamp papers and he will disburse the personal loan in cash. The interest rate is too high and I would not recommend this option for any borrower.
Microfinance companies provide loans at many affordable rates of 22-26% but they require weekly payments and they do not lend to individuals. They focus on women and follow group lending. In group lending, money is lent to the entire group consisting of 5-8 women. In case a member of the group is unable to pay an EMI, other members chip in on her behalf.
Gold Loan companies provide personal loans against collateral collected in the form of Gold Jewellery. Their interest rates are the lowest but you will have to bear the ignominy of pledging your family gold. This option can be used by those who need money urgently to meet a financial emergency. Gold loan companies like Muthoot Finance and Manappurram disperse the loan amount within 24 hours of your application being approved.
Once you have determined from which lender you are going to borrow money, the next step is to check your credit score with India’s largest credit bureau CIBIL. Bankers and NBFC’s disburse loans to individuals who have a CIBIL score greater than 750. The CIBIL score ranges between 300 and 900.
Do let us know how your loan application experience was in the comments section below.