Personal Loans: Banks vs. Money Lenders

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• You’ve got a huge expense ahead of you and your savings aren’t going to cover it. You’ve con-sidered selling off a couple of assets, but that will do more harm than good in the long run. You’re left with two real options – take a personal loan from a bank, or approach a moneylender.

• You’ll secure finances from both sources, but there is a world of difference between the two.

Let’s take a look at both op-tions objectively:1. Loan application:

Banks: Banks will ask for a formal application with a set of documents that verify your identity, address, profession, income, etc. and that have been cross signed by you. They will then process this applica-tion and decide whether to give you a loan or not.

Lenders: Lenders will, at the most, take a few pic-tures of you and have you followed by a few goons (a.k.a. “collection agents”) to make sure you are who you say you are.

2. Loan documentation:Banks: Banks will draft a legal document that contains all the possibilities and eventualities that could arise out of giving you a loan, protecting themselves and you against possible mishaps in the future. Interest rates are fixed, loan amounts are fixed and nothing changes between when you take the loan and when you repay it.

Lenders: Lenders will give you the money and expect you to stick to the honour system and pay them back. Since nothing is official or on paper, the lender can claim that he gave more than he actually did, or change the interest rate and de-mand more than what’s due.

3. Loan Sanctioning:Banks: Your approved personal loan amount will appear in your bank account once all the formalities and processing has been completed.

Lenders: The lender will keep a brown paper bag full of money on the table in a dimly lit room, while his goons stare you down.

4. Loan Amount:Banks: Banks conduct thorough credit history checks and other checks and produce a detailed analysis about your creditworthiness and ability to repay before arriving at a suitable loan amount.

Lenders: Lenders will give you the amount you ask for, regardless of your credit history. This isn’t always in your best interest, as the “repayment ability” check is more for your benefit than the banks, and you may not be able to repay the hand loan without selling an organ. Still, you’ll get how much you ask for, and not even established banks can make that claim.

5. Loan Repayment:Banks: Banks conduct thorough credit history checks and other checks and produce a detailed analysis about your creditworthiness and ability to repay before arriving at a suitable loan amount.

Lenders: Lenders will give you the amount you ask for, regardless of your credit history. This isn’t always in your best interest, as the “repayment ability” check is more for your benefit than the banks, and you may not be able to repay the hand loan without selling an organ. Still, you’ll get how much you ask for, and not even established banks can make that claim.

6. Repayment Penalties:Banks: Banks will charge you a penalty fee or a fine for missing EMI payments, and this will affect your CIBIL score.

Lenders: Remember those big scary “collection agents” from before? If you default on your loan from a lender, they will (as has happened in many reported cases before) break your legs and take your valuables up to the amount due. However, this will not affect your CIBIL score.

7. Interest Rates:Banks: These interest rates are set considering the industry standards and after the consideration of a whole lot of other macro-economic conditions. The prevalent rates right now are between 15% - 25% per annum. Personal loan taken from banks seldom get cleared in under 12 months. Also, rates don’t change once agreed upon.

Lenders: The interest component of the equation for a hand loan from moneylenders is decided by the lender himself, depending on his mood or how he chooses to do business. Another interesting fact about moneylender interest rates is that they are cal-culated on a monthly basis. The prevalent rates range between 2% - 5%, and are expected to be cleared well under 12 months. Rates can change as and when the lender feels like it, and can get away with it since there’s no legal document protecting you.

8. Tax:Banks: Borrowing from banks can get you a tax-waiver depending on what you use the loan amount for. Tax deductions of up to Rs.2,00,000 are available under Section 24B for interest paid on a loan that’s used to purchase, construct or renovate your home.

Lenders: This is purely a cash transaction, off the books and records, and will not provide you with any insurance benefits. Instead, you may have a few people in uniform asking you where you got that brown paper bag full of money.

ConclusionAfter careful consideration of these points, it’s evident that the better way to secure personal loan credit (for 99% of the population) is from an established bank and with fully legitimate paperwork.

It must be noted, however, that borrowing from moneylenders makes sense to some people like businessmen and the remaining 1% who need quick liquidity to make quick profits and quick repayments – basically those people who have the ability to circulate money fast and just need an in-vestment and a super-short-term loan.

Borrowing from moneylenders is also an option to those who wish to keep their credit requirements, etc. off the books, and only wish to meet emer-gency expenses with quick funding. It should be noted that it’s a dangerous type of borrowing, and only those with sheer and unwavering confid-ence in their ability to repay loans quickly must consider it.

Not all moneylenders will break your legs, differ-ent lenders operate differently, just like different banks operate differently.

Choose wisely.

Visit: http://www.bankbazaar.com/personal-loan.html