While personal loans can help with short-term financial needs, the growing exuberance seen lately in retail lending could trap many of India’s youth in debt. A comparatively safer alternative to personal loans are flexi loans, also known as dropline overdraft facilities.
Here is a comprehensive look at how they differ from personal loans and the instances where they prove to be a better alternative to personal loans.
A flexi loan is an overdraft facility, wherein the sanctioned credit limit at the beginning of the loan tenure gradually decreases until it reaches nil by the end of the specified tenure.
For instance, if you start with a loan of Rs. 8 lakh for four years with an annual reduction facility, it diminishes to Rs. 6 lakh after the first year, Rs. 4 lakh after the second, and Rs. 2 lakh after the third year, and eventually down to nil.
The reduction rate can vary depending on the lender you choose. Some choose to reduce principal amount month to month, quarter to quarter or semi-annually. However, the amount you have in your overdraft account can be withdrawn any number of times as per your need without any limit.
For instance, after the first year, the overdraft limit is Rs. 6 lakh. So, you can withdraw up to Rs. 6 lakh in a single instance or as smaller amounts multiple times before the year ends, up to a total of Rs 6 lakh.
Personal loans are lump-sum loans disbursed upfront, which are repaid through fixed equated monthly instalments (EMIs). In the case of personal loans, the interest is charged on the entire principal amount of the loan. But in the case of flexi loans, the interest is charged only on the outstanding amount that you have taken out and not on the total sanctioned limit.
Flexi loans can be both secured or unsecured, i.e., they may come with a collateral or without the need to attach a collateral. Under the secured option, collaterals, such as fixed deposits (FDs), mutual funds, or property can be utilised, resulting in a lower interest rate. On the other hand, an unsecured option may charge you a higher rate of interest. The rate of interest would also depend on your credit score and job.
One advantage of flexi loans is that they do not have any annual maintenance charge. Only the monthly interest is charged on the outstanding balance. Processing fees will, however, be charged, around 1-3 per cent, similar to what is charged on a personal loan.
Another advantage of flexi loans is that they give additional flexibility of a revolving credit line for individuals who expect regular borrowing needs.
Ultimately, the choice to take either a personal loan or a flexi loan would depend on your specific financial requirement. So, it is important to assess your loan amount needs and repayment horizon before choosing a loan. If you need a larger amount for a specific purpose, such as buying a car, you can consider a personal loan because the rates are marginally lower than those on flexi loans, because of the facility of overdraft.
But if you are borrowing for a home renovation where you do not need all the amount at once, you can consider a flexi loan, because then you can use the revolving credit line and you will only be charged interest on the amount you have withdrawn, and thus save on your interest outgo.
