“Defaulter” is a dreaded tag for both the lender and the borrower. Who are the people who default on loans? Why do they take a loan if they can’t afford to repay? How do they get a loan in the first place?

A defaulter can be a salaried or self-employed, middle class individual. Or, a high end customer with residences and offices in prime localities. (There are ample reports to prove this!) Defaulters could belong to any segment of society.

Could it be that defaulters just dupe banks if the outstanding runs into a few lakhs? Well, it could just as well be just a few thousands. Or it could be money taken to buy a new car or a personal loan to invest in a business. The borrower may just choose not to pay.

There could be a few genuine reasons for which a borrower may not be able to repay a loan, momentarily, or at all.

The current market crash and the resulting economic slow down have cost many people their jobs. Deprived of the means to repay, these people may not be able to pay off the loan.

Another reason could be unsound medical condition or ill-health. If an individual is confined to bed for a period of time for medical reasons. Or, is impaired temporarily or forever.

Yet, another could be divorce. It’s common to take a joint loan with a spouse to increase the loan eligibility. And then, one fine day (!), the marriage busts. A study suggests that 11 out of 1, 000 marriages end up in divorce in India. If the separated partner does not have sufficient means, the loan could end up as a default.

And here is something interesting. You can default intentionally too! Yes, despite stringent lending norms, there are borrowers who default intentionally. Here’s how:

Fudging identities and forging documents
A newspaper report talks about Mandeep Singh from Panchkula who applied for a loan of Rs seven lakh for buying a Mahindra Scorpio. Posing as car tool-kits trader, he got the loan. He submitted a photocopy of his PAN card and an income tax return of some town in Himachal Pradesh. It was difficult for verification agency to clearly ascertain the claims. After repaying a couple of installments, it was found that the borrower was a fraud and was untraceable. All the submitted documents were fake.
Another common instance of forgery is that of a bank statement. It has been seen that potential borrowers shows a high account balance till the time the loan is through. Once done, he withdraws the amount. Salary statements and addresses seem to be on the top of the list of forgeries.

Organised rackets
If you have some hands-on experience with dealing in bank loans either as verification or sales agent of loans or credit card sales through telemarketing, you may find the ‘Mr Hyde’ side of your personality planning sinister stuff. All you will need is a set of original documents (anyone’s). Don’t ever trust your friends or an agent so much that you hand over your original documents and forget about them. These documents could be misused.

Things have been happening so suddenly. It was a while before I realized I am almost stuck in a trap (or at least to me it seemed to be so). I am not much of a savings person. I use my credit card a lot.

The only saving grace seems to be that I have taken no loans and I have no liability.
Otherwise I’d be stuck in a debt trap. With no way to know how to get myself out of it. Let’s just say that I am one of the “lucky” ones. What about those who are not so lucky? What can they do when in a debt trap?

One option is to go to a financial advisor or consultant. But, they can be expensive.
The better solution is to approach a credit counseling center. There are several credit counseling centers in cities across India.

Some banks also have own credit counseling centers too, such as the Bank of India-sponsored Abhay, at Dadar in Mumbai. This agency, the first of its kind, also has centers in Gumla (Jharkhand), Wardha, and Chennai.

ICICI Bank’s credit counseling centre, Disha has centers at Ahmedabad, Hyderabad, Vijayawada, Kanpur, Delhi, Chennai, and Kolkata.

These centers will help you chart out a plan to repay your debts. You can swap your high cost borrowings for low cost debt. Interest rates may be bought down to as low as 18 per cent for levels such as 36 per cent in some cases.

These centers can also help you restructure the loan portfolios and formulate repayment plans. They may also help borrowers negotiate with banks for restructuring debts.

Here are the addresses:

• Abhay (Bank of India), 61 A, Sadanand, 1st Floor, Above Bank of India Branch, Gokhale Road (north), Dadar (West), Mumbai- 4000 028. Call 022-24221843.
• Disha (ICICI Bank), Prince Apartments, Ground Floor, Karani Lane, Ghatkopar (West), Mumbai 4000 028. Call 65971815/86/87. Visit www.dishfc.org
• Union Mitra (Union Bank of India), Union Bank Bhavan, 239, Vidhan Bhavan Marg, Nariman Point, Mumbai- 400021. Call 022-22896502.

In the current scenario when inflation is at its peak the middle class is going to be in the soup. They need to be aware of many ways in which they have to maintain their basic standard of living, for which people fall into the trap of debt. The most common and easily available loan to for a cash infusion with the lowest documentation is the personal loan. All loans if not taken for a purpose that is not of need it causes pain and could lead to distress.

Let’s see how an individual lands up in a debt trap:

Mr. X belongs to a middle class family with four dependants. His father is retired person. His mom and wife are not earning members of the family. Mr. X is the only bread earner for the family. He has a daughter who just started with schooling. Due to unavoidable personal responsibilities he had to take a loan of Rs.1,00,000 at 21% for one year. The EMI was Rs.9311.37. He was working with a private limited company where the pay is just so-so. His take-home pay is hand to mouth. After taking the loan, within the next three months he lost his job. He was unable to pay the EMI on time. He defaulted on his payments with the bank. After few months he got a job in a good MNC company and wanted to take on one more personal loan to repay the previous loan and come out of the defaulters list.

Since Mr. X already defaulted once, it would be difficult to fetch him a personal loan. To pay back the first debt he wants to go for a second personal loan. This would make him fall again in the debt trap. This time it would be difficult for him to come out of it.

Before taking a personal loan think that whether you genuinely require it or not. In case you have decided to go ahead for a personal loan do not just go with one bank and stick with their terms. A bank knows that a personal loan is more of an “individual’s requirement”. It is not a product which the bank needs to sell or offer it to the people. In current situations many of us are forced to perform things which we do not like, but still we have certain responsibilities to fulfill. This compel us take a personal loan to meet our current obligations or desires only. One does not even consider how much essential one’s credit-worthiness is. In future when one actually requires a personal loan it will not be easy. The bad track record would be an obstacle. It is better to find out with more banks and financial institutions with what rates they offer. Then take a call and find a best deal.

The other option is to take a secured personal loan. They have lower interest rates. The securities which lie in the lockers are of no use to us. In India we are very emotionally attached towards our possessions and we feel we can not deploy them for taking a loan. But if in case it fetches a lower rate of interest on your personal loan, then those possessions are invaluable. In India by personal we understand it is unsecured in nature. Our insurance policy, shares, investments made in National Savings Certificate, Kisan Vikas Patra etc can help you get a personal loan at a lower interest rate which other wise would be very high.

A personal loan is easy to obtain because the interest rate charged are very high. In financial markets there is nothing said as free lunch, you pay for each and every thing you want. So it is sensible to approach many banks and then go ahead with that bank which can offer you the best deal. Loan against security would be a better option. It will not give you sleepless nights.

Need to fulfill your short term cash needs? Personal loan is the solution. Personal loans are unsecured all purpose loans which can be taken by individuals to meet their short term cash needs. The quantum of personal loan is dependent on your income and repayment capacity. Personal loans usually have a high fixed interest rate with a fixed repayment period, you should always think of taking a personal loan as the last resort after you have utilized all other sources of cash.

Personal loans are available from Rs. 10,000 to Rs. 10 lakhs for any purpose depending on your requirement, you can utilize the money in any way you want to; there is no restriction on the end usage of the loan. Personal loans are given without any security, guarantor or collateral, resulting in a very simple, fast and quick approval process. The loan lifespan ranges from 1 year to 7 years.

The quantum and the interest rate of the personal loans depend on different factors:

1. Whether you are salaried or self employed
2. Your monthly income
3. Your employment stability
4. Total EMI payments towards your existing loans
5. Repayment track record of previous loans, if any
6. Your age
7. Your stability with the place of residence

The personal loan quantum and the rate of interest are totally dependent on your profile and the documents you provide for verification. After signing the loan documents, a demand draft or a cheque is drawn in your favour by the lender and you need to deposit post-dated cheques for the lifespan of the loan agreed by you.

Apart from the interest charged some other charges might be applicable. These charges can be charged at the time of disbursement of loan, during the lifespan of the loan, or when you terminate the loan. These charges include (a) processing charge (b) pre-payment fee (c) late payment charge (d) cheque bounce penalty (e) documentation charges (f) duplicate statement fees

Who can take a personal loan? Personal loans are provided only to resident individuals in India. Banks do check on your age minimum being 25 years and maximum being 65 years, your salary or income (if self employed), stability of profession and place of residence.

Before you proceed for a personal loan do ask few questions to yourself:

1. Is personal loan the right option? As stated above, personal loans are very expensive and you should only opt for this when there is no choice left with you and you are in need for short-term cash.
2. Is my loan lifespan appropriate? Do analyze your daily expenses, otherwise to repay early you might have to cut down your even your necessary expenses. The early repayment might not be the better option in that case.
3. Am I taking advantage of all the discounts I’m eligible for? Women get discount in many public sector banks, NBFC/Banks provide discounts to existing customers, do check on this and avail the discounts available and you are eligible to.
4. Have I chosen the right repayment schedule? There are options available for repayment of the loan, it can be larger payments at the beginning (upfront) or larger payments later in the lifespan of the loan.

You must choose a personal loan repayment period and schedule that matches your needs. Choose a shorter repayment period if you are expecting an inflow of cash in short run, this will help to meet your immediate cash needs and you will be able to repay the loan with less amount of interest.

Most banks and NBFC provide group life insurance as loan protector insurance. Purchasing this insurance ensures that the insurance company pays the lender in case you meet with an unfortunate incident. This protects your dependents from your liabilities.

A comparison of short term credit options:

Using the above table you can choose an option of a short term loan, with a view of repaying it as early as possible.

Personal Loans are loans taken to meet any type of personal expenses e.g. medical, marriage, family function, education, vacations, travel, home purchase, improvements etc. No security is needed but qualifying criteria is stringent and banks are more than happy to entertain qualified individuals with minimal paperwork. Personal loans are cheaper than credit cards, but more expensive than home loans. So if you have taken a personal loan and are thinking about prepaying the personal loan, you must base your decision on prepayment keeping the following things in mind.

Firstly you must be aware of the Method of calculation of Interest Rate for your personal loan. This is very important to know in order to compare other options (interest rates) available to you. Personal loans are usually given by either Flat rate, Reducing Balance or Advance EMI (normally used for consumer durable loans). In the flat rate methodology, the Interest charged is basically Simple Interest. So if you take a personal loan of Rs 2,00,000 at a flat rate of 15%, your Interest is going to be Rs 30,000 per year for tenure of loan. In the case of Reducing Balance, the EMI and the Interest computation is equated in EMI’s over the tenure of the loan and then you are charged. The Interest is charged on the Balance Outstanding. So effectively this means that between going for 10% flat and 10% reducing EMI method for same tenure, the reducing methodology is a cheaper option. In Advance EMI lenders/banks normally take 2-3 EMI’s in advance effectively reducing your principal amount. Interest is charged on the entire amount instead of the reduced principal interest. So basically, for a loan of Rs 2,00,000 with 3 advance EMI’s(Rs 30,000) of Rs 10,0000 your loan may actually be for 1,70,000 but you may be charged interest on the entire Rs 2,00,000. Therefore, once you are aware of the method of calculation of interest for your personal loan you can consider the various options available at the time of prepayment and make a sound judgment on the prepayment of loan.

Secondly, an important factor to consider is the foreclosure penalty that you will have to pay while foreclosing (early payoff of loan) your loan. So if you have gone for a 1 year, 2 year, 3 year, 5 year personal loan and you decide to foreclose the entire amount, then banks charge you about 4%-5% as foreclosure loan. The reason is because at the time of taking loan they have quoted you a competitive rate based upon a set tenure. So if you think that you have money available to you through other means and that the 4% cost is something you are willing to incur, you can make prepayment of your loan. Also, when the bank offers you the option of pre-payment it does not give the flexibility of part payment . If you decide to repay the loan earlier than the pre-determined period, you have to pay the whole outstanding principal. If you have a minimal surplus available to pay a part of your loan that would reduce your interest burden, but the bank does not allow it.

Finally, the decision is based taking into account the above mentioned factors along-with the Interest rate scenario at the time of deciding to prepay. If Interest rates have risen since the time you have taken your personal loan it would make sense to continue with the loan. However if interest rates have fallen since you have taken personal loan it may be worth considering taking another personal loan (with reduced interest rate) in order to pay off the more expensive loan on the condition that the bank allows you to do so and after taking into account the various costs (processing fees of new loan, cost of foreclosure of old loan, etc), prepayment would still be the cheaper option.

The author is a Certified Financial Planner, working as Senior Manager with Mumbai-based SRE Financial Planners.

Consider this scenario where you need to discharge certain payments immediately, but are faced with a liquidity crunch. You think of taking a personal loan which is the most convenient method through which you can easily meet all your expenses easily. Or swipe a credit card.

While swiping a credit card in a situation like this may seem to be the simplest solution, it would be wise to avoid giving in to the temptation. It is undoubtedly the most convenient option, but not necessarily a smart one, considering the rate of interest charged is around 35-44 per cent.

Similarly, it is very important to search out the best options that can avail you money according to your requirements and terms. The rates for personal loans range from 12-25 per cent. Now, what are the options available if you want to cushion the impact of interest outgo?

For one, you could try secured loans.

At a time when personal loans have become a norm, most consumers remain unaware of loans against securities including fixed deposits (FDs), national savings certificate (NSC) and jewelry.

In contrast with personal loans and credit cards, secured credit options such as overdraft against FDs attract an interest of 9-10%. This is the prime reason why more prudence needs to be exercised while choosing the mode of credit.
Apart from rate of interest and repayment period, the key determinants to your decision should be the speed of disbursal and of course, urgency of your need. The minimum tenure for a personal loan is 12 months, which means that this option is effectively ruled out if you require a loan for just a couple of months.

Loan against gold jewelry is another viable option. It can be used to fund your short-term needs and is one of the cheapest borrowing avenues available today. Most banks promise hassle-free documentation and quick approval. You can borrow up to Rs 10 lakh and 80% of your ornaments value, and need not specify the purpose. Repayment period usually ranges from 3 to 12 months; some banks also allow you to choose between repaying the loan at maturity or through the EMI route.

Unsecured loans are a very good option for people who do not want to pledge any asset for the security of the loan. Here you are completely free from the collateral matters. Involvement of property in the loan consumes a lot of time. This is due to the property check required to be observed for the placed collateral. So, unsecured loans save your time and provide funds without any complication.
The repayment period of the loan may vary from 1-5 years. These loans are relatively high on cost due to the higher rate of interest.

In unsecured loans lenders observe the repayment capacity and credit record of the borrower. Borrower owning a good credit history is always preferred by the lenders as they provide an assurance to the lender.

The Flipside

If there were no chinks in the armour of secured loans, personal loans and credit cards wouldn’t have been so popular. The first obvious limitation of secured loans is that they demand collateral.
If you do not have any assets to pledge, or are not comfortable mortgaging your prized collection of jewelry, you have no option but to turn to unsecured loans.

Finally, loan-seekers would do well to remember the golden rule that almost everyone is aware of, but few follow: “Borrow if you think you can repay the money comfortably shortly, and always borrow within your means. Never fall into a debt trap.” Secured loans constitute one method of reducing the interest burden and helping you avoid getting ensnared by the debt net.

The author is Research Executive at Apnaloan.com Services (P) Limited.