Should you avail of the COVID-19 personal loan scheme?

·Columnist
·3-min read

The second wave of the pandemic has impacted thousands of families in India. Many people contracted the virus, had to be hospitalised, while some unfortunate succumbed to death.

This has left families devastated not only emotionally but also financially as hospital bills have run into lakh. Coupled with job losses, pay cuts, loss of income, many families have had to face severe cash crunch.

To help families tide over such crises and ease the cash flow pressures, the Reserve Bank of India has announced a special personal loan scheme with relaxed terms and repayment conditions.

These special purpose loans can be availed by individuals for treatment of COVID-19 for self or immediate family members. An amount of up to Rs 5 lakh can be borrowed under this scheme. RBI has capped the interest on such loans at 8.5%. Some banks like Bank of Baroda are offering it for as low as 6.85%.

The loan rate is very attractive compared to regular personal loans which are being offered at rates in the range of 9% to 14% depending on your CIBIL score.

There are no foreclosure charges and the tenor of these loans is up to 3 years embedded with a six month moratorium. During the moratorium, no installments need to be paid.

Banks have different eligibility criteria to calculate the sanctioned limit. This scheme is, however, available to only existing customers of banks - salaried, non-salaried professionals and pensioners.

Should one avail such personal loans?

Personal loans should be used as a last resort in an emergency situation as it is the costliest option. However, the rate of interest on COVID-19 personal loans is lower. It is much better than taking a regular personal loan or converting hospital bills spent through credit cards into EMIs.

It is better to use idle cash or even break FDs which are currently offering very low rates to meet hospital bills than taking this personal loan.

Only if you are confident that you can utilize your cash balances to earn more returns than 8.5% (interest charged on such loans), let’s say by investing in stock markets, peer to peer credit, or any other avenues, you should not use cash and go for this loan.

Some people build emergency funds to meet such emergencies and can use them instead of taking COVID-19 personal loans. However, they should not forget to top up the emergency fund once their situation improves.

If you have gold, then you should go and sell a portion to meet such expenses. After all, gold is kept for such hardship days. The price of gold also is good, currently around Rs 48,000 per 10 gram.

If you own mutual fund investments or shares, you can redeem them as well, to meet such expenditure. However, if you feel you can earn more returns than the 8.5% charged by the banks on such loans, you should go for this loan.

One should not commit the mistake of selling residential property to meet such expenditure as a house is a long term asset and is not easy to build in a short time span.

If you don’t have cash or gold or any other asset, then you don’t have much option than to avail the scheme. The existing customer criteria should not be an issue as most people today have a banking relationship after the introduction of Jan Dhan accounts.

The loan amount which banks sanction will depend upon your credit score and income levels. Remember that this loan can only be used to meet treatment expenses of COVID-19.

If you are in dire need, not strong financially and need urgent funds to cover hospital bills related to COVID-19, then go for it. Don’t forget to also take a regular health policy to meet such expenses in the future.

A personal finance lesson for all of us during this pandemic is that we should all take a health / medical policy which covers COVID. In that case we would not run into such high costs which need to be paid from our pocket.

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