As we approach the end of 2020, festivities are right around the corner, and this is generally marked as an auspicious time to purchase new items for our households. Starting from electronics all the way to new materials of clothing, all of us purchase something or the other either for us or our loved ones. Due to this buying spree, one common trait you would have definitely noticed among your favourite stores is the increased marketing of consumer durable loans, and thus in today’s article, we will discuss everything you need to know about consumer durable loans.
Let’s get started.
What Is a Consumer Durable Loan?
Before we dive into the intricacies of consumer durable loans, it is important for us to first understand the meaning of consumer durable loans.
In simple terms, a consumer durable loan is a financing instrument through which you can purchase any consumer item (like clothing, electronics etc.) and pay for it in easy instalments instead of paying the whole amount upfront. Most consumer durable loans are unsecured in nature, meaning that as the borrower, you do not need to put forward any collateral or pledge any asset to avail the loan.
One of the most interesting aspects of consumer durable loans is the fact that they decrease the entry barrier for purchasing new items, thus making it easier for an increased number of people to access their desired items. Along with this, most consumer durable loans come with competitive rates of interest, instant disbursal and flexible repayment tenure, just like a personal loan.
Along with this, since most leading store chains these days offer consumer durable loans, the ease of access has further been increased, thus promoting more customers to access and utilize its services.
Consumer Durable Loans: Things to Note
Now that you know the exact meaning of a consumer durable loan let us take a closer look at some of its important features.
Rate of Interest
As with any other loan, the most important factor we need to first consider is the rate of interest associated with a consumer durable loan. Consumer durable loans, just like others in the market, arrive with a variable and competitive rate of interest depending on the item you are purchasing, but generally, most consumer durable loans have an interest rate in the range of 12% to 36%. One of the main reasons as to why these loans come with a higher interest rate is because they are unsecured in nature, meaning that you do not need to pledge any collateral to avail this loan. Thus, the risk associated with the loan is high, and as you might have already guessed, the higher the risk, the higher is the interest rate.
If you take a close look at the various consumer durable loans on offer, you will find a similarity that most of them arrive with a flexible or easy repayment plan. Depending on the net cost of the item you purchase, the lender will offer you either a long or a short tenure for your consumer durable loans. Along with this, when applying for one, you need to take into consideration how you will budget your finances when repaying the loan. Most financial experts suggest taking a longer tenure for expensive items and vice versa.
The processing fee in your consumer durable loan can be understood as the amount charged to you by the lender for processing your application, and these generally arrive in two flavours, variable and fixed.
Depending on the item you purchase and the lender you choose, this might vary; however, experts suggest that you should always opt for consumer durable loans with fixed processing fees as one with variable processing fees can significantly affect your personal finances in the long run.
These days for most consumer durable loans, there is close to no down payment or a mere 25% down payment for an expensive purchase. Experts suggest that availing a consumer durable loan with a down payment is a better financial decision as compared to one without, as it will ensure your investment in the process and encourage you to complete your EMI payments on time.
Along with this, paying an upfront down payment also ensures that the EMI amounts you pay in the future will be significantly less.
Impact on Your Credit Score
Now that you are aware of the most important details related to consumer durable loans let us better understand the financial impact of a consumer durable loan on your credit score.
Just like all other loans in India, a consumer durable loan also arrives with an impact on your credit score.
As mentioned in an earlier paragraph, since a consumer durable loan is an unsecured loan by nature, in order to check your eligibility for the same, the lender needs to check your credit score. Along with this, it is important to note that every time a lender checks your credit score, it is categorized as a hard inquiry by the credit rating agency (that is CIBIL or Experian), and this decreases your score by a few points.
But How is Your Credit Score Calculated?
In India, there are two main credit rating agencies, CIBIL and Experian, and they take into consideration four main factors to determine your creditworthiness. They are:
- The total number of loans you have taken in the past
- The total amount of credit you have accessed in the past
- The number of timely payments you have made
- The number of timely payments you have missed
Depending on how you perform on each of these factors, the lender gives you a score out of 900 and generally, if you want your application to get approved quickly, you need to have a score of 750 or above.
Additionally, if you take a consumer durable loan and, under some circumstance, you fail to pay your EMI on time, this will be counted as a default on your credit report, and the impact of this can be quite severe.
Now that we have discussed with you the most important aspects of a consumer durable loan, it begs the question, is a consumer durable loan worth taking? While there is no straight answer to this question, one answer we can confidently back is that, if you are a responsible lender, you can go ahead and take a consumer durable loan or vice versa.