What are 12-month loans?
The concept of the 12-month loan comes from Britain and the United States where you can take small loans and pay them back over a period of 1 year. They are also referred to as payday loans because the idea behind them is that you take what you need till you get paid and then pay the loan back as soon as you receive your salary. The industry in the US is a multi-billion dollar one and has grown to astronomical proportions in the last few years.
Features of the 12-month loan
- The amount that you can borrow depends on the lender and can range from GBP 200 to GBP 1,000 or more in the UK.
- The amounts are dispersed very quickly; sometimes even in a day’s time once you apply.
- Payday loans may be approved even if your credit history is bad.
- They are generally available to those who are above the age of 18 years and have a regular income.
- You can even apply for this loan and get approvals online which means there is no need to run around.
Interest rates for 12 month/payday loans
The downside of these loans is that they come with extremely high-interest rates which can, over the course of a year, amount to more than 100% p.a. Some lenders offer interest rates of 89% per annum while others may offer well over 1000% per annum. There are those who offer considerably lesser interest rates too.
Benefits of payday loans
- They will help you tide over your expenses, till such time as you receive your salary.
- They are issued quickly so you don’t have to run around or wait for the money to come.
- Payday loans can be issued even if your credit history is not that good. Which means that you always have an option of getting financed no matter your credit situation.
Dis-advantages of payday loans
One big disadvantage of payday loans is the interest rate which can be in excess of 1200% per annum. What this does is increase your debt astronomically, if you are not careful with it. Another disadvantage of these loans is that they can work against you if your end-goal is financial stability. The set up is similar in the US as well where these loans can feature interest rates as high as 1900% per annum.
Personal Loans vs. Payday Loans
Personal loans in India are loans that you can take for a duration of 6 months to 5 years or more. These loans are unsecured and don’t come with any conditions on how you are supposed to use the money. They can be taken to fulfill commitments that arise from impending marriage expenses or payments for school fee or even a desire to go on a vacation.
What is the interest rate on personal loans?
The interest rates on these loans will obviously depend on the bank that you approach but it could range from 12% per annum to 20% per annum. Some banks like ICICI Bank charge around 13% per annum while banks like HDFC may charge between 15% and 20% per annum. These interest rates are subject to change from time to time but remain fixed for the duration of your loan. Certainly compares more favorably than a 100% on a payday loan!
Eligibility criteria for personal loans
These loans are available to people who meet certain conditions which are:
- They should either be salaried or self-employed.
- They must also have a monthly income that is no less than a specific amount defined by the bank. This amount varies for metro cities and non-metro cities with metros having a higher monthly income requirement.
- Their age needs to be between 21 years and 60 years. This age criteria is also subject to the bank’s own policies and may, in some cases, be increased or decreased.
- If applicants are salaried then they might be required to have a minimum work experience of a few years (generally 2 or more years) with the last year having been served with their current employer.
- With certain banks like SBI it may also be required that the ratio of your EMI and you net monthly income not exceed 50. This is done to ensure that you don’t end up taking a loan that you won’t be able to pay back.