It only charges the interest component as EMIs, and involves flexibility to convert the loan to term loan anytime during the tenor
Personal loan is an effective financial solution to raise funds for personal expenses like house renovation, wedding, consolidating debts against one loan, capitalising on an investment opportunity, or, simply taking a long-awaited vacation and so on.
Individuals always seek for more benefits through one product and financial products are no exception. Personal loan comes in different variants and consumers today have multiple options to choose the type of loan he or she desires to take.
Personal loans by some of the banks and non-banking finance companies (NBFCs) offer flexibility to the consumer in terms of consumption and repayment of the loan.
Today, consumers can decide whether they need a lump-sum amount, or spread the loan amount in multiple tranches over a period of time and pay EMI accordingly. The consumer today can choose to pay EMI, or pay only the interest on the amount availed as an EMI, and repays the entire principal sum at the end of the tenor. Flexible personal loan offers all of these benefits to perfectly suit requirements of different individuals.
So, let's understand first why should one avail a flexible personal loan? What are its advantages and benefits? How does it benefit in the long run?
Availing personal loan gives individuals an opportunity to fulfil their financial obligations or achieving their dreams, making them a hugely-popular financial solution in the current scenario. The flexible personal loan is a unique credit facility that allows consumer to use the loan amount as required and pay interest only on the amount used. Consumers also have the flexibility to withdraw any amount within the allotted limit in the specific tenor. The key feature of flexible personal loan is that consumer have to pay interest on the amount withdrawn. While the interest is payable every month, the total amount withdrawn has to be repaid at the end of the chosen tenor of the facility. This can help the consumer manage their finance better by paying lower EMI’s.
Another advantage of a flexible personal loan is that one can convert it to a term loan at any point in the defined tenor. This means if the consumer realises anytime during the loan tenor that they would not be able to repay the principal in one go at the tenure’s end, consumer can choose to convert it to a term loan and pay in EMIs of principal and interest. A term loan is a monetary loan that is repaid in regular payments over a set period of time.
The interest rate on such loans ranges between 14-18% and depends on the risk profile of each individual. Risk is access based on the income, credit score, repaying ability, job profile, etc., of the applicant. Banks and NBFCs see the EMI consumers pay does not exceed 30-40% of their net income. Any existing loans are also considered when deciding on the loan amount and even approval.
A flexible personal loan also help consumers save significantly on the interest. Unlike a regular term loan, the interest is charged on the amount utilised in the given period. So, consumers pay only the interest component in EMIs and the principal amount at the end of the tenor, thereby reducing EMI amount by almost half.
However, it is necessary to understand the difference between the features and benefits of a personal loan and flexible personal loan.
Personal loan involves borrowing a fixed sum of money and paying interest on the total sum borrowed. It is ideal for those who seek to borrow money in one single shot and have no recurring financial needs. The application process is online and requires submission of documents like application form, identification proof, salary slips, among others. These again can be provided online, like providing Aadhaar number for identification proofs. Consumers have the flexibility to make part prepayment of loan but these may incur some charges. Consumer pays a fixed rate of interest on the loan and EMIs contain a mix of principal and interest.
A flexible personal loan, on the other hand, gives a credit facility and allows the consumer to withdraw based on the financial requirements. Consumer can make any number of withdrawals and deposits back in the loan account. Consumers pay interest only on the amount used and not on the entire amount. Prepayment of a flexible personal loan is easy and involves no charges. It allows you to prepay an amount and re-avail the prepaid amount anytime without the hassle to apply again. It only charges the interest component as EMIs, and involves flexibility to convert the loan to term loan anytime during the tenor
The writer is senior vice president, consumer business, Bajaj Finance Ltd
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