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Personal Loan is like a good SUIT, it has to fit right and it has to price right.

Before going in for a personal loan you should budget your loan requirement and should allocate which expenses will be met from this loan.

Bienu Vaghela

25 Jan 2010

You have to factor in few aspects before customizing personal loans to your needs.

Personal loans enable you to take care of your immediate requirements without much of a hassle. Like you do not have to give any kind of security, collateral or even guarantors to avail this loan. Moreover you can utilize the loan amount for any purposed except that for any speculative purpose.

Now that festive season is over and you have made purchases to your heart's content or have spend it all on the weekend gateways to your favorite resorts.

And now you are thinking about how to come out of the burden of various debts. As funds are limited, so how do you do that. A personal loan is the solution. Before going in for a personal loan you should budget your loan requirement and should allocate which expenses will be met from this loan.

The amount of loan will depend on your eligibility based largely on your income like net take home salary. The loan is repayable in equal monthly installments or EMIs and loan tenure varies from 1 to 5 years. Since personal loans do not require any security or hypothecation of assets, the rate of interest charged by the banks is higher compared to any other secured loans which are taken against a security of an asset like home, car, gold, or even equities.

Is it easy to get a personal loan? Yes, as there is less paperwork, since the bank does not have to verify any asset as in the case of home loans. No, as there is stringent income criteria to qualify. But once you make the grade it takes only about three four days for you to get a personal loan - a lot less time than a home or car loan.

Here is a step-by-step process to be followed for personal loan application process:

  • Get in touch with a lender but before that you should know which bank is offering best rates and best services. You can compare rates interest rates by visiting any reputed price comparison sites. After short listing a handful of them, you can get in touch with as many lenders as possible and get them to make loan offers to you. Then negotiate with them to get the best interest rate. Also try to know if there are any special offers. After you have got all the banks to make their offers, select your lender based on the information you have in front of you.

  • After finalizing the lender, the lender's direct selling agent will visit you and collect documents supporting proof of income, residence proof, and identity. You may be required to produce copies of IT returns, salary slips, bank statements, ration card, passport, driving license, and other relevant documents. These requirements vary from lender to lender.

  • After submitting the documents, a field investigator will visit your home to double check the facts provided in the documents, such as your place of residence, tenure at work place and so on. It is essential that you are present during this visit; otherwise the investigator could report that the facts you provided do not actually add up, thus forcing the lender to reject your loan application.

  • Once the lender is satisfied with the veracity of your documents, the loan is approved. The lender then disburses the amount through cheques or demand drafts (DD).

On the second thought you want to use the magic wand the credit card to do the trick.

So how does cash withdrawal on your credit card fare vis--vis personal loan.

Firstly withdrawing cash using a credit card can turn out to be very costly if you do not repay it quickly. Interest rates on credit card cash withdrawals can range from 20% - 40% on an annual basis depending on the type of card you use.

For most credit cards, the interest rate on cash withdrawals and credit outstanding for purchases made is the same. But here is the kicker - for the purchases you make through your card you get an interest-free period to pay back. Cash withdrawals on your card have no such benefits; interest is charged from the moment you withdraw the cash. And do not forget the transaction charge - this is a charge levied on the withdrawal at the ATM.

Still you know that personal loan has slightly longer application process whereas cash withdrawal has easy access during emergency. Personal Loan has lower interest rate than credit card cash withdrawal. Apart from the higher interest rate, you will also have to pay a one-time transaction charge. Now coming to interest rates, the average interest rates charged for personal loan is in the range of 12 - 22 per cent , whereas average rate for interest is around 20 - 40 per cent for withdrawal from Credit Card.

Therefore, unless you are in a very real emergency where you need instant cash, it is advisable to not withdraw cash on your credit card. Remember you also have to repay it as early as possible to avoid prohibitive interest payments. If you have the requisite time, it is always better to go for a personal loan. It is the fastest of all retail loan products and the interest rates are a lot, lot lesser than those on credit card cash withdrawals.