IndiaLends Advisory

By IndiaLends Advisory

Mar 25, 2019

Personal Loans from Public Banks vs. Private Banks

You have decided to take a personal loan. That is the beginning of more decisions to make. With so many banks and Non-Banking Financial Companies (NBFC) offering loans, which one to go for can become a difficult decision for us to make. You might wonder, what is the difference between private banks and government banks when it comes to personal loans.  The commonality for all lending institutions is that they offer loans based on certain criteria – income drawn by you, your debt to income ratio i.e how much monthly income you have left after paying off other current loans., employment history and credit score. Since these loans are unsecured loans, defaults on loan payment is a big concern for banks. This is one of the reasons why interest rates are comparatively higher than car and home loans.

A Close Look at the Personal Loans Process in Private and Public Banks

For a better comparison between public and private sector banks, we should look at a  representative bank from each of these types. This will give a better understanding of what to expect.

SBI Bank Personal Loans

SBI has a minimum loan amount request as 24,000 in urban areas and 10,000 for rural areas. The maximum you can borrow is 12 times your net monthly income.  Generally, interest rates are lower for a higher amount.

So let us say you borrow 1 lakh for a period of 4 years at an interest rate that is from 12.50%. You will have a monthly minimum EMI of around ₹2,580 and your one-time processing fee is up to 3% of your loan. The big benefit is that there is no lock-in period and you can foreclose the loan anytime you want to. There is no prepayment penalty.

Kotak Mahindra Personal Loans

This bank offers personal loans at an interest rate of 11% to 24%. Paperwork has become fast and minimal. This means loans are processed very quickly. One doesn’t need to visit the bank, an agent will come and facilitate the whole process from your home. Their processing fee is at 2.5%. But they have a lock-in period of 12 months within which you are not allowed to foreclose the loan. Once the lock-in period ends you can close your loan by paying a 5% foreclosure charge + GST on the outstanding principal amount.


Related Article: What To Consider Before Applying For A Personal Loan In India


The Pros and Cons of Private vs. Public Banks

 Convenience:

Private Banks usually use Direct Selling Agents (DSA) to get loan customers. The advantage is that all paperwork can be completed at your home at your convenience. You don’t have to even step into the bank.  Private Banks, unlike Private lenders, don’t aggressively use DSAs so often there is more legwork involved from your side.

 Bank Processing Fee:

Private Banks normally have a higher processing fee, since a payment needs to go to the DSA as well. Also, the convenience of getting a personal loan at your doorstep comes at a cost. Public banks that do not offer these conveniences normally also have a lower processing fee.

Interest Rates:

The interest rate decides your EMI so it is the topmost priority. It was long believed that private banks charged higher interest rates than public banks. But this is no longer true as Private Banks have become more aggressive in getting customers and one way is being more competitive with lower interest rates. Where Public Banks score over private banks is that when there is a policy rate change by the Reserve Bank, the private banks react quicker to pass the benefit to their customers.

Efficiency and Turn-Around Time:

It is true that if you want a loan quickly then it is best to take one from a Private Bank. They give a pre-approved loan which helps to reduce paperwork.  Private Banks are also more digitized compared to Nationalized Banks, making them able to process loans much faster. Also, Public Banks are very stringent on eligibility criteria which cam means it takes more time to process the loan disbursal.

Prepayment Options:

Here is where Public Banks outscore Private lenders. Private Banks usually have no lock-in period or no penalty prepayment fee. On the other hand, Private Banks have a lock-in period of 6-12 months and prepayment charges can be a hefty 5%.

Ease of Banking:

While it is true that PSUs are catching up with Private Banks with respect to technology, the mobile apps and quicker adoption of technology   Private Banks. Dedicated Customer Desks and easy phone contact is still where Private Banks score high.

So, what will you choose a Private or a Public Bank? The decision will finally rest on how quickly you need the personal loan maybe. This is because as already highlighted, Private Banks usually have simpler paperwork and faster processing time.


Previous Article: 5 Myths About Credit Score and the Truth Behind Them


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