Choosing the right loan – I:

Salaried Employees

From the previous series on Credit Scores, we’ve had a glimpse at the various options available if you are looking to borrow funds or raise a debt for personal or business needs. However, deciding what kind of loan suits your purposes best depends on a variety of factors. These include profile of the borrower, the amount and the extent of the loan, repayment tenure, interest rate applicable, early repayment options (if any) and the availability of security or assets against which funds can be borrowed.

Borrowers can be broadly classified into four categories –

1. Salaried employees
2. Self-employed individuals
3. Self-employed professionals and
4. Businesspersons

The loan options available depend on the risk profile of the person, capacity for repayment, tenure of the loan and nature of the loan – secured or unsecured. In the first part, let us look at the loan options that you as an employee have access to.

Salaried employees are the least risk category of borrowers, and are preferred customers for most lenders, as the repayment of monthly installments can be set directly against the salary account. However, new employees who have just joined the workforce can find it difficult to get loans, as they do not have a credit history by which their creditworthiness can be judged. For such employees, it is important to create an early credit history. Therefore, it is advisable to get a credit card from your bank as soon as your salary starts, even if it is with a low spending limit, in order to build your credit history. Usually, banks where you have your salary account would be happy to provide you with a credit card based on your income.

Based on the type of loan required, you can look at two options– secured and unsecured.

Unsecured Loans

1. New to Credit Loans: If you are a new employee looking for loans, lenders can provide unsecured loans on the basis of your salary statements, usually if you have one year or more of work experience. This has a low borrowing limit with a relatively short tenure of up to 18 months. Creditworthiness is decided on the basis of credit information reports and substantiated by other measurements such as your employer, age, social media profile, etc. This loan can be useful if you are looking for short term funds for education courses, etc.
2. Personal Loan: This is the most common category of unsecured loans available. If you have been working for more than a year, own a credit card and have filed income tax returns, it is possible for you to avail of a personal loan for various reasons such as getting married, your child’s school fees, etc. Loan limits and tenure are decided by the creditworthiness of your profile and income tax returns, credit report, etc.
3. Credit Card Balance Transfer: This is a personal loan used to pay off outstanding credit card dues and improve your credit rating. Credit charge interest rates can be high, and a personal loan will free up credit limit while ensuring you repay the outstanding amount as installments.
4. Education Loan: An education loan is given for studies, either that of the borrower or their spouse or child. Repayment starts after the completion of studies, allowing the student time to secure a job, on the basis of which the loan can be repaid. Education loans for studies in institutions of repute such as IITs, are usually funded to the full extent of the fees and living costs, etc. 

Secured Loans

1. Home Loan / Loan against Property: If you plan to buy a home, a home loan is a typical secured borrowing that you undertake. This category of loans is the most common and has the largest value as well as tenure. If you already own a home, you can choose to extend the existing loan to the increased value of the property, or if no loan exists, take a loan against the estimated value of the property. This secured loan can be useful in case of large fund requirements such as weddings, fees for higher education etc.
2. Consumer Durables Loan: If you are looking to buy a new television, refrigerator, mobile, etc., you can finance it through a consumer durables loan. Loans are available for 100% of the value of the goods and tenure up to three years, with no interest being charged to the borrower.
3. Car Loan / Used Car Loan / Used Car Refinance: These are loans given against the purchase of the vehicle, and depending on the nature of the vehicle (new or used), the extent of loan, tenure and interest rate varies. Used vehicles are normally funded for up to 90 per cent of the value of the vehicle. In addition, if you have a vehicle on which the loan has already been paid up, you can choose to get it refinanced, giving you a form of secured personal loan.
4. Gold Loan: If you have gold jewelry, you can use this to borrow funds. This is a form of secured personal loan where the jewelry is assessed and a loan of up to 75% of the value of the gold is provided. Gold loans also provide you with flexible repayment options. For example, you can choose to repay only interest during the tenure and repay entire capital at the end of the loan, or repay capital in installments based on the availability of funds, etc.
5. Loan against Shares / Mutual Funds / ESOPs / Insurance / Bonds: For select categories of shares, mutual fund units, bonds, insurance policies, etc. borrowers provide funds against the value of these assets. On repayment, the assets are returned to the borrower.

Based on your individual requirements, creditworthiness, tenure, repayment capability, etc. the above categories of loans can be availed by salaried individuals. Having a variety of options available ensures that borrowers can pick and choose the best option available to meet their financial requirements.