Over recent years, there has been a boom in the number of unsecured loans availed by individuals. The retail portion of the bank credit has been overweighing the loans allowed to the commercial sector. However, the outbreak of the Corona Virus has changed it all. There is economic uncertainty all over the world.
Loans have always provided the much needed financial relief during tough times when you weren’t able to raise the required cash on your own. Be it medical emergencies, purchase of a two-wheeler, a four-wheeler, consumer durables, payment of school/college tuition fees, or meeting a cash crunch towards the end of the month.
But is it still good to apply for a bank loan whenever you think it is needed? You may need to think about it. We tell you why.
No one can predict the course of the Corona Virus. While some states in India seem to have passed the peak of infection, there are many other states still reeling under the effects of the virus. Some states are going back to lockdown as a measure to curb the spread.
With such scenarios staring at you, there will be an impact on the businesses. Layoffs are still news. Those with jobs don’t know if there is stability with decreased revenues for the companies.
It might not be the ideal decision to increase debt in these times where your repayment capacity over the near future does not look bright.
Increased Scrutiny on Loan Applications
As the economic condition has turned sour, lenders have started enhanced scrutiny over the loan applications as they are tightening their policies. Lenders are looking for better creditworthiness as represented by the credit score. They are also paying more attention to the industry you work in.
For example, Applicants from the aviation and the hospitality industry may not be preferred, while applicants in the Consumer Goods sector may still find it easy to get loans.
The minimum income bar might also have been set higher. Another factor that lenders pay attention to is your total EMIs in relation to your income. While earlier some lenders would lend even if your EMIs made up 50% of your take-home income, it would be tougher to see those decisions being made now.
In these circumstances, it might not make financial sense to apply for a bank loan. You might not only be rejected but also result in another credit inquiry against your PAN.
Remember, increased credit inquiries in a short period of time can bring your credit score down.
Difficulty in Getting a Loan for those with a Moratorium
If you have applied for a moratorium for your existing loans, then you may find it difficult to get fresh loans. Applying for a moratorium implies that you are facing difficulties in meeting your debt obligations, which make you ineligible for further loans during the period of moratorium.
Banks may be very stringent about giving loans to those who are already running on a moratorium. Applying for a fresh loan will just result in contributing to another credit inquiry which might not be good for your credit score.
Maintaining a good credit score is extremely important, during the pandemic or otherwise, as you don’t want to spoil your chance of getting a loan anytime.
Pointers to Keep in Mind If You are Going for a Loan
In spite of all the reasons given above, you may need to apply for a loan. You should keep a few pointers at the back of your mind while applying for a loan from a bank.
Evaluate Your Need for a Loan
Apply only if there is a real need for funds. Do not avail a loan to buy stuff that you may not need, or upgrading existing gadgets like a mobile or TV without a reason.
Think About Existing Loans/other Commitments
When you think of a loan, always take into consideration your other debt liabilities and any other expected expenses in the near future. Make sure the loan that you avail does not eat into your monthly budget or endanger your financial position in the future.
Compare other Charges and Clauses Associated with the Loan
Any loan comes with a lot of associated charges or clauses like a processing fee and prepayment penalty, etc. It is best to choose a loan with the least amount of extra charges and the best rate of interest.
For Example, Personal loans from banks come with a prepayment penalty which can be exercised only after completion of a set period like 1 yr. Choosing loans like athat can be availed without any prepayment penalty just after the payment of 3 EMIs may be a better option. This helps you pay back your loan if your finances improve in the future.
Ease of availing the loan
With the pandemic, it is still not safe to step out of your homes for things that you can get done online. Not many banks allow online loans yet which may require you to make multiple visits to the bank premise for a loan, which may put you at risk of contracting the virus. Availing a loan from an online lender from the safety of your home is the best thing to do.
If you finally end up availing a loan from a bank or an online lender, make sure you make prompt repayments.