riends all going on a holiday and you don't have the cash to join them?

Just landed a new job in a new city and moved into a new company apartment and want to do it up?

If you want to opt for a personal loan on these, a word of caution: this one is the most convenient of the loan species, and the most dangerous, too! Don't just rush in to grab the cheque.

It's convenient because you do not have to provide a security (shares, car, gold, home). This is referred to as an unsecured loan. Should you default, there is no asset that the bank can claim to get the money back.

Nor do you have to produce a guarantor.

And, best of all, you don't have to disclose the reason for taking a loan (you can't take a car loan for a home).

Dangerous because it is so inviting. And so expensive!

The personal loan is the most expensive loan in the market simply because the risk the banker takes on you is high. He has no security from you on the loan being repaid. So he takes a chance, for which he expects you to pay dearly.

Be prepared to shell out around 20% per annum for this loan.

Here are some schemes thrown in as a bait. Read the fine print before you fall for it.

• Read this before you take a personal loan!

1. Hey, I am offering the best rate ever!

One foreign bank has started sending loan certificates to its customers.

The certificate will tell you the amount you are sanctioned and offer you a great interest rate of 14.95% calculated on a monthly reducing balance.

And, yes, they even give you a deadline beyond which you cannot take this offer.

There is no denying this rate is low compared to the industry average. What's the catch? You have to take the loan for 48 months, not less. And, need I tell you, the longer you take the loan, the more you end up dishing out.

Check this out. 

	Situation I	Situation II
Loan amount	100,000	100,000
Repayment	48 months	36 months
Interest	14.95% monthly reducing	19% monthly reducing
EMI	Rs 2,781	Rs 3,666
Amount paid to bank	Rs 133,488 (2781 x 48)	Rs 131,976 (3666 x 36)

The EMI is the equated monthly installment, the amount you will have to pay every month to repay your loan.

Should you take a loan with a shorter tenure, you will benefit even if it has a higher interest rate and a higher EMI.

If the interest rate touches 20% (up from 19%), the 48-month offer makes sense.

2. I will give you a flexible rate!

This one is dangerous. If interest rates begin to climb upward, the interest rate on your loan could go up to 23%. That is a very expensive loan to be servicing.

• Fixed or floating rate?

A great option. But for very limited circumstances. Death or disability due to an accident will have the insurance company paying back the balance amount to the bank.

And should you lose your job, the insurance company will help you get by for some time. Three EMIs will be covered.

4. Surprise, we can waive off the last EMI!

When you read something like that, you can be sure you will end up paying more than one EMI. For instance, one of the banks offers this with two conditions:

i. The loan must not be for less than 48 months

The longer the loan, the more you end up paying.
 

	Situation I	Situation II
Loan amount	100,000	100,000
Repayment	36 months	48 months
Interest	19% monthly reducing	19% monthly reducing
EMI	Rs 3,666	Rs 2,990
Amount paid to bank	Rs 131,976 (3666 x 36)	Rs 143,520 (2990 x 48)

ii. The rate of interest will be marginally higher

Let's say the Rs 100,000 loan is now going for 19.25% for 48 months.

That means your EMI will not be the same as the above example (Rs 2,990). Your EMI will now be Rs 3,003, and you will end up owing the bank Rs 144,144.

Now, even when you subtract one EMI, you realise you have paid quite a bit by servicing a loan with a higher interest rate and a longer repayment tenure.

5. You only pay for what you use!

This is a good option. You state the maximum amount of loan you need, but pay interest only on the amount you use.

So say you have been sanctioned a limit of Rs 300,000, but use only 100,000. You end up paying interest only on the latter amount.

But check if the interest rate for such an option is higher than the interest rate on a plan loan with no such option.

6. Lower EMI in the first year!

This is great if you are expecting a salary hike the following year. Or if you are taking the loan for your wedding, and you and your spouse will repay it later.

The loan is structured in such a way that you end up paying lower equated monthly installments in the first year and it increases from then on.

• Want money on your home loan?

Any options?

Remember, financial institutions don't care much about how you use the personal loans as long as you they are convinced that you are a good candidate to pay it back.

So the choice falls on your able shoulders. Start by first determining whether you really need the money, how much you need, what you need it for, and if you can afford the EMI every month.

Personal loans can be a fun way to go on that vacation or just spend on yourself. But, like all products, the packaging sometimes belies the fine print. So make sure you know what you are getting into.

And save some money for emergencies so you don't have to do this again. In the long run, self-finance is the cheapest!