Consumer Loan

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.

A lot of banks give out consumer loans for a wide variety of consumer durables. Nevertheless, even if you were to visit the branch of a popular bank or check their website, you may not be able to apply for one. Only a handful of banks in India actually process consumer loan requests directly and that too in a limited number of cities and branches. To prevent fraud and possible misuse of funds, most banks have tie-ups with merchant chains and large stores, both online and offline. They accept applications only when the process is initiated through such a merchant. This lets banks negate a large part of the risk as they only choose stores that have a good reputation.

Banks have also managed to identify products and brands that have extremely low default rates. This lets banks offer consumer loans for certain products and brands at absolutely no additional cost or interest. If you want to buy a new smartphone or an air conditioner, chances are good that you will find such a scheme waiting for you. The only thing to note here is that if you default on such a consumer loan, the penalties are fairly severe.

As noted earlier, some banks and financial institutions do allow a customer to apply directly at the bank for a consumer loan. Here is a list of some of these options.

• HDFC Bank Consumer Durable Loan: HDFC banks offer a consumer loan for their existing and new customers with up to 100% financing for select consumer durables that cost at least Rs. 40 thousand. They do charge a nominal processing fee and the interest rates are similar to that of personal loans. The maximum limit for the loan is Rs. 15 lakh and the term of the loan can be 12, 18, 24, or 36 months. This loan is available only in 11 major cities at the moment.
  The minimum age must be 21 years for salaried applicants and 26 years for self-employed applicants. The maximum ages are 60 years and 65 years in the same order. HDFC Bank also has fairly lenient income eligibility criteria. The minimum monthly income for HDFC bank salary account customers is Rs. 15 thousand. For other salaried applicants, it is Rs. 18 thousand. Self-employed applicants need to submit an ITR showing at least Rs. 1.5 lakh as annual income.
  HDFC also has tie-ups with merchants and retailers where they provide 0% interest loans. However, most of those are reserved for HDFC customers who have a credit card or a special debit card from the bank. This type of loan must be initiated through the retailer at the time of purchase. These offers are generally more common during the festival season and the launch of a much-anticipated product.

• Tata Capital Consumer Durable Loan: Tata Capital Services offers consumer durable loans for purchase of household durable items like televisions, high-end audio systems, refrigerators, microwave ovens, etc. The loan has lenient eligibility criteria and documentation requirements. Many products are also eligible for interest-free EMIs and even zero processing charges. The repayment period is between 6 and 24 months. The minimum and maximum loan amounts are Rs. 10 thousand and Rs. 1.5 lakh respectively. However, funding of up to Rs. 5 lakh may be considered if adequate proof of income is provided. Existing Tata Capital credit card holders are eligible for enhanced benefits and limits. Similar benefits are also extended to applicants who wish to purchase credit life insurance or extended warranty. The final say on the limit is at the discretion of the company.
  All salaried and self-employed Indian nationals above the age of 21 years are eligible to apply for this consumer loan. The maximum age limit is 60 years for salaried individuals and 65 years for self-employed applicants.

• Capital First Consumer Durable Loan: Capital First offers instant approvals on loans for the purchase of select household consumer durables from partner merchants. Loan amounts can range from Rs. 8,000 to Rs. 5 lakh. These loans are available at 0% interest with a nominal processing fee, and have no foreclosure charges. Capital First is one of the few institutional lenders that offer consumer loans for the purchase of furniture.
  The application process is kept simple. Applicants must be Indian nationals between 21 and 65 years of age. Along with the KYC documents, an applicant also has to submit a post-dated cheque for the first EMI and a repayment mandate.
  Consumer loans are a great option to fulfil the aspirations of a rising middle class. They enable you to buy essential household items or the gadget of your dreams. Just remember that as with all forms of credit, ensure that you have the means to pay it off comfortably. Always plan your budget before you act on an impulse when purchasing with a consumer loan.