If you have a zero balance salary account at any bank, the bank has to at least recover the money for servicing your banking needs. This is why banks allow zero balance salary accounts, hoping that they could target the salary account holders for credit cards, personal loans etc.
They have access to your bank account statements, which means they know your salary. Once in a fortnight customers would receive calls for enquiring for personal loan or a credit card, in case you do not have one.
While credit cards are helpful, personal loans you should never avail and we will tell you the other options in place of personal loans later in the article.
Why you should not take personal loans?
Undoubtedly, interest rates are the highest for personal loans after interest on credit card balances. Interest rates can range from 12 to 24 per cent, whereas other options like gold loans, the interest is way cheaper.
Apart from this there are processing fees that are payable, which under many other loans is often very low or waived off. If you need to payback the personal loan there is a pre-payment charge ranging from 2 to 4 per cent of the amount, which makes the loans even costlier.
Clearly, personal loans are the worst loans to take and often the charges are high on account of the fact that they are unsecure loans. For the customer it is a bad idea to avail the loan on account of the reasons mentioned above.
What are the options in place of personal loans?
In place of personal loans an investor has various options. I am sure there must be some gold lying idle at home. Gold loans are a good bet simply because the interest rate is very low. State Bank of India offers you gold loans at an interest rate of just 7 to 7.5 per cent.
Another advantage of gold loans is that you can pay anytime without worrying about prepayment charges. In case of gold loans it is also important to remember that you need to pay back the bank or gold loan company the loan amount or they have rights to do what is appropriate with your gold to recover their loan amount.
If you are taking a large size loan remember that the interest that you pay on personal loans can be very high.
In terms of interest rates, processing fees and pre-payment charges personal loans are rather high, which does not make it an attractive proposition. Look for other forms of loans like gold loans, loans against shares, loan against property etc., where the interest rates are much cheaper.
A personal loan should be the last of your options and only if you are in dire straits. Also, the frequent calls from bank executives maybe tempting to take that holiday or an expensive gadget or personal loan. However, you should avoid that temptation.
About the author:
Sunil Fernandes has spent 26 years covering business and finance in India and abroad. Sunil has worked with frontline daily newspapers including Hindustan Times, Deccan Herald and Gulf Times. He has also worked with investment magazines like Dalal Street Investment Journal and Oman Economic Review. His forte remains stocks, mutual funds and tax planning.