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Taking a personal loan? Some tips
Joydeep Ghosh
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August 29, 2007

Personal loans, most financial planners would say, is a bad thing on your balance sheet. And it is simply because of the fact that the interest charged is rather high - anywhere between 12 per cent to 50 per cent depending on the profile of the person.

Of course, bankers would defend themselves saying that since these loans are without any collateral, unlike a car or a home loan, the high rates are justified. But for the loan-taker, personal loans are like the proverbial "Sword of Damocles" hanging over their head, till they have repaid the entire amount.

However, if you have to take a personal loan then it is important to be very clear on a few things. For starters, shop around a bit for the best interest rate. If you work for a company, then the bank, which has an official tie-up with it is very likely to offer you a better deal.

But remember, when you get calls saying, "We are offering you a flat rate of 'x' per cent", the question to ask is, "What is the number in case of reducing balance?" This is because there is normally a good 10 per cent difference between the flat and reducing balance methods.

Then, as Anirudh Sengupta, director, ISE personal finance services, says, "One should always check the foreclosure clause in the loan document."

That is because most banks do not encourage you to prepay the loan in the first six months. The penalty - a whopping five-six per cent, plus service tax.

Also look at the default clause. Most banks charge Rs 250 for a first default and Rs 500 for the second one. There will be a myriad of other clauses, for example, that the bank can recall the loan at any time or hike the interest rate.

However, despite all these drawbacks, it is better to opt for a personal loan vis-a-vis cash withdrawal on credit cards.

This is because while a credit card may allow you to withdraw the cash immediately, the moment you take the cash, there is a transaction fee. Most banks charge you between 2-2.5 per cent of the amount withdrawn.

In other words, on Rs 10,000, you would be shelling out Rs 250. An interesting point to note here is that while transaction fees are a percentage of the amount taken out, there is a minimum fee that you have to pay even if you withdraw smaller amounts. And that is just the beginning.

After this, one gets into the usual loop of rolling credit. If you pay back the entire outstanding amount, then you will be happy with the results. But if you are prone to rolling over, you would be shelling out over 40 per cent per annum on the credit card cash withdrawal.

As financial planner Sajag Sanghavi puts it, "Cash withdrawal on credit cards is the worst form of loan that one can take."

He advises you to first clear credit card bills, even if you have to go for a personal loan, and then target clearing your personal loan debt. And live happily ever after.

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