The Growing Popularity of Personal Loans: Factors, Highlights, and Interest Rates
Personal loans have witnessed significant popularity in recent years, primarily due to the widening gap between income and expenses, coupled with increasing aspirations. The year 2020, marked by pay cuts and job losses due to the COVID-19 pandemic, has further driven the Indian Personal Loan Market. Additionally, personal loans offer attractive features and widespread availability, making them easily accessible to the masses. The digitalization of loan processes and the recent reduction in borrowing costs have positively influenced the personal loan market this year.
According to recent updates and an RBI report, the share of personal loans in total bank credit has grown from 16.6% to 24%.
Conversely, loans to the industrial sector experienced a decline from 41.2% to 30.6% in March 2020. However, the personal loans sector has continued to grow steadily and robustly over the past five years. Here are some highlights that indicate the growth of personal loans:
- As per the RBI report, personal loans account for 28% of total bank credit as of 2020.
- Unsecured lending, especially among young individuals, has witnessed significant growth in recent years.
- The growth rate of consumer durable loans is on par with personal loans. Fintech lenders have played a crucial role by offering loans through partnerships with existing NBFCs or banks, making unsecured/personal loans more accessible and affordable for customers without the need to visit traditional banks.
- Female borrowers held 34.2% of the total loan accounts in March 2020, compared to a 21.1% share in the previous five years.
- The number of loan accounts with banks increased by 17.3% in 2019-20, indicating a rise in bank lending over the past year.
- Personal loans experienced a growth rate of 28% compared to 33.5% in the same period the previous year.
- However, with the increase in the number of personal loans, there has been a decrease in the average loan amount offered by NBFCs.
- Among the 28% increase in personal loan accounts in 2020, 37% were customers who borrowed for emergencies such as medical and healthcare needs.
- The moratorium period offered by banks has been a significant factor in helping personal loan borrowers maintain liquidity during times when they have existing loans.
- Some consumers might face difficulties repaying their ongoing loans after the end of the moratorium period.
Interest Rates and Their Impact on Personal Loans
The interest rate at which a personal loan is approved determines the cost of borrowing, with lower interest rates resulting in lower monthly EMIs and vice versa.
Choosing a personal loan with a comparatively lower interest rate is crucial. In view of the pandemic, the RBI has provided guidelines to reduce personal loan interest rates, making it more favorable for borrowers to opt for this type of loan. This reduction in interest rates could be one of the reasons for the increased number of personal loan borrowers. To secure a personal loan at the lowest rates, it is important to compare rates and choose the best lender for your needs.
Remember, the key to a hassle-free borrowing experience is selecting a lender that offers the lowest interest rates on your loan.