A consumer loan, as the name suggests, is only given for the durables that are considered to be household items. When looking for a consumer loan, remember that what feels like ‘free’ money is just a loan. You have to repay the loan with interest, plus any fees and interest that may be attached as per the terms. Opt for a consumer loan only if you are confident that you can manage to pay the EMIs comfortably.
Types of Consumer Loans
There are many different types of consumer loans. The distinction between the types is not always so clear. Most banks in India simply give out the loan at personal loan interest rates, making one no different from the other. This is important to note as many people would naturally assume that they are applying for a consumer loan but end up taking a personal loan instead. For almost all intents and purposes, it makes no difference. However, it is worth noting that personal loans generally have longer tenures and higher limits. On the other hand, many banks and financial institutions offer 0% interest consumer loans for certain items and brands. You would never be able to get such a deal with a personal loan. Further, should you need a personal loan while your so-called consumer loan is still active, the application may get denied because you had only recently applied for and gotten approval for one.
It is important to read the terms and conditions carefully even as you are distracted by the prospect of a new purchase. Many banks have tie-ups with stores and chains. The store will usually try to push a loan from a certain bank on you while you may stand to get a better deal with your own bank. Go through all your options carefully before you consider signing the documents.
This is why it is important to understand the many kinds of consumer loans. The essential types are discussed here.
Credit Cards: Even though you may not think of them as such, credit cards too are a type of consumer loan. Credit cards are the easiest way to avail a ‘loan’ since you are already approved for it. However, interest rates on outstanding credit card balances are incredibly high. It is helpful to be aware of your credit card’s terms since new accounts usually come with a short period of no or low interest rates. Missing a payment can mean the cancellation of this offer. You can also expect higher interest rates, service charges, and late fees. They can easily turn out to be instruments of financial destruction that can wreck your credit rating as well as your peace of mind.
To make matters easier, some banks offer to convert large purchases made on a credit card into an actual consumer or personal loan. When you opt for this, the credit card’s limit will usually be lowered by the total cost of the purchase or the loan amount until you pay off the entire amount with interest. This can still help you avoid paying excessive interest that you would have to pay for any outstanding balance on the credit card. But even with such a cushion, it is best to avoid large purchases on a credit card if you intend to pay pack in instalments.
Instalment Loans: This is the most common form of consumer loans. Instalment loans are a broad category of loans that you pay off in, well, instalments. The instalments may have to be paid weekly, fortnightly, monthly, bi-monthly, etc. according to a preset timetable. The most common form of consumer loans is usually repaid in monthly instalments. The interest rate may vary or be fixed. Similarly, the loan may or may not require security or collateral.
- Fixed rate consumer loan: Most consumer loans offered to customers are fixed rate loans. As the name suggests, these loans keep the same interest rate throughout the duration of the loan period.
- Variable rate consumer loan: In a variable rate consumer loan, the interest rate charged on the outstanding balance varies as market interest rates change. As a result, your payments will vary as well. These usually have caps or floors on how high or low they can move. Most consumer loans offered by banks in India tend to have short tenures, usually a year or less. Even if the rate does change, it does not mean a large departure from the interest you would pay with a fixed rate consumer loan.
- Secured loans: Secured loans are those which are secured by assets as collateral. Secured consumer loans in India usually involve hypothecation of the item being purchased. Some banks also give out consumer loans with other instruments as security. The possible options for collateral include fixed deposit accounts, RBI Bonds, gold or jewellery, LIC policies, etc. Interest rates are usually lower for secured consumer loans. If you are unable to repay the loan for any reason, the lender bank is entitled to claim your security to make up for their loss. However, that is an extreme step and most banks will usually give you the option to repay the loan first, albeit with penalties, higher interest rates, and a hit on your credit report.
- Unsecured loans: Unsecured consumer loans are the most common. The borrower does not have to provide any kind of assets or cash as security to the lender bank. Interest rates for unsecured loans can be high. However, most banks and financial institutions that offer consumer loans do so at extremely low rates, and if you fulfil certain terms and conditions, you may not even have to pay anything over and above the agreed price of the consumer durable. There are no or minimal extra charges and the loan is offered at 0% interest. There are caveats to such an arrangement which is discussed in the next section.