In the times of the Novel Coronavirus (Covid-19) pandemic, every institution that lends money has gained prime importance. The Banking Sector and the Non-Banking Financial Sector (NBFC) will soon become the equivalent of a cookie jar, from which every child with a sweet tooth would want to take out cookies as per his cravings.
Banking In The COVID19 Affected World
Let me explain this particular analogy. After north of 40 days of financial and economic inactivity, every business is going to fall short of funds at some of the other levels. Due to the apparent lack of money in the market, every business, big or small and every individual, rich, middle-class or poor, is going to be short-strapped when it comes to the liquidity of cash. At the same time, the government, along with the Reserve Bank of India, is going to take steps to increase the amount of money in rolling. Hence, post lockdown, when the business reopens, everyone is going to turn to banks for short term and long term bailouts. Thus, the analogy of cookies, where the jars are the lenders, the children are the borrowers, and the cravings are the financial needs.
However, to truly understand this analogy, we need to understand what loans are as well as know their different types.
Loans are defined as borrowing of money from the one or more individuals and/or organisations as a result of a mutual contract for the timely repayment by the borrower to the lender, generally along with a specific rate of interest. In our cookie analogy, the child has to return more cookies than he ate when he first ate them. Also, until the child returns the pre-decided cookies in the stipulated time, he will always remain indebted to the cookie jar.
The Banking Sector and the Non-Banking Financial Sector (NBFC) will soon become the equivalent of a cookie jar, from which every child with a sweet tooth would want to take out cookies as per his cravings.
Loans are of different types: Personal Loans, Corporate Loans, Education Loans, Car Loans, Home Loans and so on. Corporate Loans are the loans with absolutely ethereal sums of money that the banks and NBFC’s give to all the players of the corporate world, big and small alike.
For perspective, think of cookie jars emptying almost all their cookies for the big bullies who play football, in hope for a higher amount of cookies in return.
However, for this article, we are going to lay a particular focus on the loans that are going to see the biggest hike in a post-coronavirus era, i.e. personal loans. However, before we move on to personal loans, another industry must be considered, i.e. The Credit Rating Industry. Every individual and company, which has ever associated itself with a bank, i.e. as much as opened a bank account, have a credit score. The credit score is a gauge of how timely and disciplined the individual/ company has been in borrowing and repayment of loans and other dues. In simple words, a credit score is a measure of your relationship with the bank. The more dates you default, the worse your credit score is.
For perspective, think of credit rating companies as dentists who monitor every time the child takes a cookie, how the child eats it, how much nutrition the child derives from the cookie and how timely the child is, in repaying the dues. Based on the dentists’ score, the cookie jars decide how many cookies it wants to give to the child. Now for the financial geeks, the credit rating companies monitor every rupee that is borrowed and repaid. To the extent, that the purpose that the money is used for is observed as well, along with the profits. Individuals have a CIBIL score on a scale of 0-850. Now, why this topic is relevant to the concept of Personal Loans shall be understood later.
So, a personal loan is a type of loan given by banks to individuals for different purposes related to that individual or to offset a short term financial emergencies. Personal loans are not the loans that we take for purposes funding the operations of an existing business or for specialised purposes like buying a car or buying a new home. Separate Loans exist for these purposes.
One more attractive characteristic of Personal Loans is that since they are often taken to offload financial pressure during a financial emergency, these loans can be availed, within a couple of days. Personal loans, also have a variety of loans that can be availed of based on the needs, the financial background, the credit score and so on.
The different type of personal loans are as follows:-
1. Secured Personal Loans
When a Personal Loan entails keeping of security for availing the loan, it’s a secured personal loan. A security is any tangible asset like jewellery, power of attorney of property papers and likewise, that we keep as collateral. In the event that the borrower defaults on the loan, the borrowing party can sell the collaterals to make up for the losses.
Coming back to our analogy, for availing the cookie from this particular jar, the child will have to keep a muffin as security.
The benefit of this type of loan is that there are lower rates of interests and less scrutiny. Individuals with low credit scores should consider this option.
So, by keeping a muffin, a child with low dental health can loan a cookie easily.
2. Unsecured Personal Loans
The name itself explains what this category of a loan. Majority of personal loans available on the market. These loans generally have a higher interest rate than secured personal loans. However, the rate of interest fluctuates with the credit score of the applicant. This category of loans is available at a very short time if the applicant is a truste-able customer or an applicant with a high credit score.
If you are a child who doesn’t have a muffin, doesn’t mind giving back an extra cookie when you repay and need the cookies at the earliest then this should be the ideal type for you!
3. Variable Rate Loans
A lot of loans base on market-risk. This concept is very similar to the dividend concept of the share market. Just like the rate of dividend given to shareholders depends on the profits made by the company, the rate of interest on these loans depends on a set of benchmarks and criterions set by the bank.
Availing such loans is a risk; the rate of interests can fall or rise. The only risk-free way of taking such a loan is to take it over a short term. The most prominent criteria for deciding the variable rate is the market rate of interest. If the market rate is lower, so will the investment rate be. So, if you are a child willing to risk the number of cookies you repay on the market ecosystem, then this one is for you.
4. Fixed-Rate Loans
Considering the previous concept, this concept becomes pretty self-explanatory. A Fixed-Rate loan is one where the amount of interest doesn’t change over a period of time. Hence, this benefits those who are prudent financial planners as they know the exact amount to pay. You know how much you have to pay after a given period of time. So, you should choose a fixed-rate loan because that’s a more prominent option in the market. So if you’re that child who wants to plan his monthly cookie intake to decide how much he has to repay, then this one is for you.
5. Debt Consolidation Loans
A very common option amongst prudent planners and reckless individuals, a debt consolidation loan is a loan that an individual takes to clear multiple existing loans and consolidate all of them into one single loan. For reckless individuals, it’s useful because it allows them temporary restraint from a growing debt crisis. For prudent planners, it’s useful to choose a plan wisely. This is because this may allow lower monthly interest than the previous bunch of loans.
So if you are that child who’s looking to acquire one lot of cookies, this is the one for you. Take this to clear the multiple existing liabilities.
6. Co-Sign Loans
A very interesting but tough to acquire the option, a co-sign loan is a loan where an individual who has a fragile credit history and has no collateral to keep as well, ropes in a wealthy, trusted individual who has a good credit score or has collateral to keep or has both, to guarantee that if the applicant doesn’t repay the loan, he/she will repay it.
This type of loan requires a lot of scrutinies. But a person can easily avail it if the co-signer has a very good credit score. Having said this, better the profile of the co-signer, higher the chances of granting of loans and lower interest charges.
So to sum it up, if you are the child who has bad dental health and has no muffins, then you can still avail the cookies. But only if you can get another child with strong dental health and array of muffins to back you.
7. Personal Line of Credit
Now comes probably the safest and the most borrower-friendly loan system. A Line of Credit is a type of loan involving revolving credit. It’s based on the simple funda of borrowing only that amount which is the need of the hour for borrower. And the magical part is that for this type, the bank charges interest only on the amount withdrawn. So, the banks might sanction a higher amount for a Line of Credit. But the borrower can take only what he needs and hence pay interest only on that sum.
So if you are the child who takes cookies in bits and pieces, then this is the option for you.
8. Traditional Personal Loans
The type of loan that you borrow from relatives, friends, business contacts or traditional moneylenders. These loans have little to no documentation and generally have abysmally high-interest rates. Moreover, financial experts do not prefer these as there are multiple things that can go wrong. Relations can be spoiled, and the amount of interest is impractical at times. Moreover, the chances of fraud are high. However, they are easy to acquire owing to the lack of documentation. Also, there’s no keeping of collaterals (except in the case of moneylenders). Hence, a large part of India’s unorganised sector depends on this credit option.
Classic Moneylenders, the so-called saviours of the unorganised sector.
9. Miscellaneous Options
There quite a few other options like wedding loans to fund big fat Indian weddings, holiday loans to fund expensive vacation trips and so on, but they are situational loans which don’t really make a difference to the wider picture.
Hence, a wise child is one who decides the borrowing from the cookie jar after careful consideration. He should be aware of his cravings, dental health, the number of muffins he has etc.
Now, in a post-Covid-19 World, why personal loans will rise is to increase the liquidity definitely, but mainly because of the rise in emergencies and the number of reasons to borrow personal loans.
Medical emergency? Don’t have a medical insurance plan or the current plan isn’t able to cover the entire medical expenditure? A personal loan is the answer.
Daughter’s wedding? Don’t have liquid money to pay the mithaiwala? A personal loan is the answer.
Salaried individual? Need urgent money to pay off outstanding dues from the times you didn’t go to work because of the pandemic? A personal loan is the answer.
Hence, Personal Loans are the answers to many such questions that will arise after lockdown gets over.