COVID-19 Personal Loans: Should you take it now & Prepay Later?

Many banks and NBFCs are looking to help out people whose cashflows have been disrupted due to the ongoing COVID-19 pandemic. And this help has been structured in the form of a personal loan with a new label – COVID 19 Personal Loans.

People are facing temporary cash crunches due to this extended lockdown. Worries are bigger for the borrowers who have active loans for which they were servicing EMI regularly till now. And the pain is deeper for the non-salaried class who do not have regular and fixed monthly salaries. Their cash flows are more uneven. But even for the salaried class, the pay cuts are looming large while many are facing job losses.

So it’s no doubt a tough time for everyone.

These Covid 19 Personal Loans are a relaxed-norms version of the regular personal loans.

How are the norms relaxed compared to the regular personal loan eligibility criteria?

Available mostly to the existing good quality retail asset customers, the biggest relaxation is in the form of a lower rate of interest. The rates on COVID-19 loans are comparatively lower than the usual personal loan rates. As far as I know, starting from about 9% they go up to as high as 14%, which is considerably lower than the regular personal loans of 12 to 20% plus depending on borrower’s credit score and income-related factors.

There is no denying that even these loans mean business for lenders. But some relaxation in the form of lower rates, etc. can genuinely help in these times. And since these Covid loans are purposely priced at lower interest rates, they can be helpful for many whose cash flows have got impacted due to the lockdown imposed by the government.

But are these loans offered to everyone? The simple answer is no.

Primarily, these new COVID-19 personal loans are offered to existing customers of lenders. And in many cases, these are only being offered to borrowers of a specific type of loan (like home loans). Or to those who already have a salary account with the bank (lender). The idea is very clear. Lenders want to help. But not at the cost of risk of default. They will lend only to those borrowers who have decent repayment track record and a good credit score.

Also, to make repayments easier, many lenders are allowing extended repayment tenures and more importantly, including a moratorium period of a few months. This is a good idea as giving a moratorium on these personal loan will give sufficient time to borrowers to get their cashflows back on track once the lockdown is lifted and then begin their EMI payments.

But it is important to note that the moratorium is not a waiver of interest or EMI holiday. During the moratorium, interest will still be charged and added to the repayment costs of the Covid personal loan. This is an important aspect that should not be missed.

How much Covid personal loan can you take?

Different lenders have different criteria. For some, the loan amount is limited to about 10 times monthly salary. In other cases, up to 50-60% of annual income (for self-employed) based on the last tax filings. Many have a simple limit of Rs 3-5 lac per borrower. But these are within the unique customer-specific limit based on income-linked-repayment-capacity and credit score related filtering criteria.

But like most loans, the lenders do not want to face default risk. So having a good credit score is necessary to be eligible for these new Covid-19 specific personal loan. A good Cibil score will clearly establish a clean track record of repaying loans via regular EMI payments.

That reminds me, the banks have already given a lifeline to existing borrowers at the behest of the Reserve Bank of India (RBI).

The lenders have been asked to consider offering a 3-month EMI moratorium on all the outstanding loans falling due between 1st March 2020 to 31st May 2020. These include home, personal, education, car loans and credit card outstanding too.

So what will happen is that for those who opt for the 3-month moratorium, their regular EMI will commence from June 2020 onwards? As it wasn’t exactly a waiver of EMI, so the tenure of the loan will increase by 2-4 months depending on when you opt for the moratorium.

And yes, the interest will still accrue during the moratorium and added to the outstanding loan amount. This is not an interest wavier but a deferment. So in a way, the total interest cost of the loan will increase.

My simple suggestion is that if you have enough liquidity to continue making repayments, then do so. It will save you from additional interest costs.

And this should be clearly understood by credit cardholders opting for moratorium period. The credit card interest rates are very high. At times, up to 30-40% per annum.

(If interested, then please read why high-interest rates make it wrong to pay only minimum due on credit cards).

Remember that credit card rates are much higher than personal loans and you should be very careful before borrowing a large amount via credit cards

(Read credit cards vs personal loans to understand this better)

As for the credit score, it will remain unaffected during the moratorium. The borrowers will also not face any late payment or penalty charges either for not paying EMIs during the moratorium period. But if you don’t start paying after the moratorium period ends (and assuming it is not extended), then, of course, your credit score will be impacted and charges would be applicable.

Coming back to the Covid 19 loans.

Not doubt the interest rates are attractive.

But don’t opt for these loans just because they are easily available and have low-interest rates compared to regular personal loans.

A loan is a loan after all. And even before these Covid loans were introduced, I am sure most of you used to get just too many pre-approved personal loans offers bombarded at you. Emails, SMS, ads in your net banking portals. Everywhere you were being surrounded with these unsolicited loan offers.

Just remember that you will have to pay interest on every rupee you borrow. If not immediately (due to moratorium), then eventually. So don’t borrow unnecessarily.

So if you can avoid, then do not borrow no matter how much the low rates tempt you. More so during these times, it’s better to not take any additional loan liability as no one knows how and when things will normalize and how it will impact your near future cash flows as well (even if flows are safe for now).

If you are really facing a cash crunch, then it is one of those times when you can dip into your emergency fund. Assuming you have it. And if you don’t have it in place, I am sorry to say that at least now you will understand the importance of having such a buffer in place.

And let me tell you that if the cash crunch is making you gasp for breath, then you can also consider stopping your regular investments temporarily. It can be a small pause before things normalize.

Be frugal during these times (and most of us already are due to the lockdown related curbs on spending abilities – check your regular vs lockdown expenses). Think hard before taking the new versions of personal loans, i.e. Covid personal loans because loans are best taken as last resort if you find yourself in a tight financial situation.

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