Sunday, October 18, 2015

Celebrate with a festival loan

Worried about your employer denying you festival bonus this year, citing poor financial performance? Don’t fret. Festival loans offered by public sector banks can bring some cheer. State Bank of India and Bank of Baroda now offer festival loans to help customers meet expenses, such as purchasing clothes, gifts, sweets and groceries.


Who can apply for the festival loan? You need to be employed in a reputed public or private company and should have had a minimum experience of two years. Your monthly net income should be at least Rs.3,000 in case you wish to avail of the festival loan offered by SBI.

The eligibility criteria for BoB is a little less stringent. Individuals who have worked for at least a year and completed 21 years of age will qualify for the festival loan offered by BoB.

Temporary employees who are on contract and non-resident Indians (NRIs) cannot apply for this loan.

If you are self-employed, you must have had minimum work experience of three years to qualify for SBI’s festival loan. BoB has a laundry list of self-employed persons who can avail the bank’s festival loans.

This includes doctors, engineers, architects and chartered accountants. Also, the bank insists on a minimum experience of two years to be eligible to apply for the loan. You should not have completed 65 years of age to apply for the loan.

Loan amount and tenor

The loan amount offered by both SBI and BoB ranges between Rs.5,000 and Rs.50,000. This will vary depending on the income level and repayment capacity of the borrower.

The loan tenor in the case of SBI is a year; this can be repaid through equated monthly instalments (EMIs). The loan tenor at BoB is 10 months.

In the interim, should you get lumpsum money from any source, you can foreclose your loan. There is no additional charge for such prepayment. According to SBI’s website, interest rate on the festival loan stands at 16.05 per cent (base rate of 9.3 per cent plus 6.75 per cent). BoB charges 14.15 per cent (base rate of 9.65 per cent plus 4.5 per cent) for their personal loan and they do not have a separate interest rate for the festival loan category.

As in the case of any other loans, individuals will have to comply with KYC norms and submit requisite documents, such as address proof, identity and salary certificate for processing the loan.

Self-employed persons will have to additionally produce proof of official address, establishment certificate and other approval certificates. If you have an account with the respective bank, documentation may be far more seamless.


How is a festival loan different from the regular personal loan? First, the interest rate on festival loan is far lower than a personal loan. SBI charges 17.8 per cent (base rate of 9.3 per cent plus 8.5 per cent) interest for its ‘SBI Saral Personal loan’ which is higher than the 16.05 per cent interest rate of the festival loan.

Second, the minimum monthly income you need to earn to avail a personal loan is way higher, compared to the festival loan.

If you go for the SBI Xpress Credit Personal Loan, you need to have a net monthly income of Rs.7,500 a month — much higher than the Rs.3,000 net monthly income required for the SBI festival loan. And the minimum salary criterion in the case of personal loan varies across cities.

For instance, if you are living in a metro, then theminimum income slab would be much higher for a personal loan. Third, the processing fee for a personal loan is much higher than the festival loan.

SBI, for instance, charges 2.02 per cent to 3.03 per cent of the loan amount as processing fee for its SBI Saral Personal loan, while for the festival loan the fee is 1.01 per cent.

Fourth, there is no prepayment charge in case you choose to prepay the festival loan. But some banks charge you extra if you opt to prepay your personal loan.

For instance, ICICI Bank charges 5 per cent of the outstanding principal amount as prepayment charges. On the other hand, HDFC Bank does not allow you to prepay your personal loan during the initial 12 months. Thereafter, they charge 2-4 per cent of the principal amount as prepayment charges depending on the time at which you are prepaying.

While festival loans score over personal loans on most aspects, the only limitation is that you can borrow a maximum of Rs.50,000 and will have to repay it in12 months. Should you need additional credit or a longer tenure loan, you may have to explore other options.

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