You plan to take a personal loan. What is the flexibility you would want from your personal loan product?
I will share a few thoughts on flexibility expected.
- Lower charges (beyond the loan interest rate). Processing fee etc.
- Zero or lower prepayment penalty. No prepayment penalty in a personal loan is asking for too much. The lower the better.
- During the initial period of the loan, if you are strapped for cash, you can pay only the interest (instead of full EMI) to keep the loan regular. Note that no lender would skip the interest. Interest must be paid every month. The only relaxation, if any, can be on principal repayment. Also, the bank won’t extend the loan tenure. Hence, the loan (entire principal) must be repaid within the sanctioned loan tenure.
- Behave like a credit line instead of a term loan. I can withdraw, repay, and again withdraw within my credit limit.
The lenders (banks and NBFCs) keep coming up with loan repayment structures that allow greater flexibility to borrowers over the principal repayment.
In this post, I consider the 3 variants of personal loans from Bajaj Finserv.
- Term loan
- Flexi Term Loan
- Flexi Hybrid Loan
#1 Bajaj Finserv Term Loan
- This is a regular term loan product.
- You borrow a fixed amount for a specific term and pay the loan through regular EMIs.
- No concept of interest-only EMI. EMI includes both principal and interest repayment.
#2 Bajaj Finserv Flexi Term Loan
Since the lender has added “Flexi”, expect some flexibility.
- You can borrow multiple times, but up to the sanctioned limit.
- As the loan is repaid (or prepaid), the limit gets freed up and you can withdraw again.
- However, the net borrowing (disbursal – principal repayment) cannot exceed the drawing power at any time. We discuss “drawing power” later in the post.
- EMI is calculated on the disbursed amount (not on the sanctioned amount).
- EMI includes both principal and interest. No concept of interest-only EMI.
To contrast with the “Term Loan”, Flexi Loan allows you to withdraw in multiple tranches (much like it happens in construction-linked home loans).
Let’s say you take a loan of Rs 10 lacs for 6 years.
- Under “Term Loan” product, you will withdraw Rs 10 lacs at one go and then repay through EMIs.
- Under “Flexi Term Loan”, you can withdraw Rs 4 lacs initially. EMI will be calculated accordingly. After a few months, you withdraw another Rs 3.5 lacs. EMI gets revised upwards. And then Rs 2.5 lacs after another few months. EMI will increase again. If you later prepay Rs 2 lacs, then the limit gets freed up and you can again withdraw up to the sanctioned limit (drawing power).
For this flexibility, you must pay a Flexi charge (think of it as a commitment charge).
The Limit (Drawing Power) Keeps Reducing as the Time Passes
This applies to both Flexi Term and Flexi Hybrid loans. While these loans have a provision where the limit gets freed up on repayment/prepayment, the lender needs to protect its interest too.
Let’s say you took a Rs 10 lacs Flexi-term loan for 6 years. You kept withdrawing (disbursing) and prepaying (freeing up the limit). However, imagine a scenario where your outstanding is Rs 10 lacs after 5 years and 11 months. The lender won’t obviously allow it.
Hence, the drawing limit (or drawing power) will keep reducing as the tenure passes. At the start of the loan, the drawing power will be equal to the sanctioned limit and will gradually go down. At any point, the loan outstanding cannot be greater than the drawing power. The sample agreement on Bajaj Finserv website allows for 2 methods of limit calculation. Reducing balance and Equated Principal Amortization.
In the Equated Principal Amortization, the drawing power goes down by the same amount every month.
In the reducing balance method, the drawing power reduces slowly initially, and the pace of reduction increases as the time passes. Think about how principal outstanding goes down with each EMI payment.
| Equated Principal Amortization | Reducing Balance or Written down value Method | |||||||
| Year | Drawing power at the start of the year | Reduction in Drawing Power during the year | Drawing power at the end of the year | Year | Drawing power at the start of the year | Reduction in Drawing Power during the year | Drawing power at the end of the year | |
| 1 | 1,000,000 | 125,000 | 875,000 | 1 | 1,000,000 | 70,030 | 929,970 | |
| 2 | 875,000 | 125,000 | 750,000 | 2 | 929,970 | 81,287 | 848,683 | |
| 3 | 750,000 | 125,000 | 625,000 | 3 | 848,683 | 94,355 | 754,328 | |
| 4 | 625,000 | 125,000 | 500,000 | 4 | 754,328 | 109,523 | 644,805 | |
| 5 | 500,000 | 125,000 | 375,000 | 5 | 644,805 | 127,129 | 517,676 | |
| 6 | 375,000 | 125,000 | 250,000 | 6 | 517,676 | 147,566 | 370,110 | |
| 7 | 250,000 | 125,000 | 125,000 | 7 | 370,110 | 171,288 | 198,823 | |
| 8 | 125,000 | 125,000 | – | 8 | 198,823 | 198,823 | – | |
As you can see, the drawing power reduces with time. While the sanctioned limit is Rs 10 lacs, the drawing power (maximum loan outstanding) at the start of the 5th year can be only Rs 5 lacs (under Equated principal amortization) and Rs 6.44 lacs under reducing balance method.
While I have shown the drawing power for every year, the drawing power will change every month. For the Reducing balance method, I have considered the loan interest rate of 15%.
#3 Bajaj Finserv Flexi-Hybrid Loan
- Similar to Flexi term loan. There is only one difference.
- The loan tenure is divided into 2 parts.
- During the “initial period”, you pay only the interest on the outstanding amount (disbursed amount). And not on the sanctioned amount.
- During the “subsequent period”, you pay the full EMI (principal + interest).
- The flexibility of multiple withdrawals and release of limit post prepayment is present in this variant too.
- Further, as I understand, the drawing power does not reduce during the “initial period”. The drawing power goes down only during the “subsequent period”.
Let’s consider a Flexi-Hybrid loan of Rs 10 lacs. You take a Flexi-Hybrid loan of Rs 10 lacs for 8 years. Initial period of 2 years. Subsequent period of 6 years.
For the initial period of 2 years, you just have to pay the interest amount on the outstanding amount. After the end of “initial period”, the full EMI will start. In this variant too, you can withdraw and prepay multiple times.
| Bajaj Finserv Personal Loan | Term Loan | Flexi Term | Flexi Hybrid |
| Disbursal/Withdrawal | Single shot withdrawal of a fixed amount | Multiple withdrawals permitted up to sanctioned limit (drawing power) | Multiple withdrawals permitted up to sanctioned limit (drawing power) |
| Flexibility | Limited flexibility | Can withdraw and repay multiple times | Can withdraw and repay multiple times |
| EMI | Full EMI | Full EMI based on withdrawal amount | Interest-only EMI during “Initial period”. Full EMI thereafter based on withdrawal amount |
| Part-Prepayment charges | Applicable | Not applicable | Not applicable |
| Foreclosure cost | Applicable | Applicable | Applicable |
| Flexi charges | Not applicable | Applicable | Applicable |
Everything Comes at a Cost
While Flexi loans (Flexi Term and Flexi Hybrid) give you the flexibility of withdrawals, you incur cost to get the flexibility. You can check all the charges on Bajaj Finserv website, I will share some of the charges below.
- Processing fee (applicable for all variants): Up to 3.93% of the loan amount. Quite high.
- Flexi Fee (applicable for Flexi Term and Flexi Hybrid): Depends on the loan amount. As I understand, this is a one-time fee.
- Prepayment charges
- If you want to foreclose your loan, be prepared to pay a hefty penalty. 4% + GST. This penalty is applicable for all types of personal Loans (Term, Flexi Term, and Flexi Hybrid). Clearly, the “Flexi loan” does not seem as Flexi now.
- In the case of part-prepayment of the loan, the penalty remains unchanged for the regular term loan. Part-prepayment charges are not applicable for Flexi loans.
Flexibility in loans is good. However, as a borrower, you must get a firmer sense of various costs, your requirements, and cashflow position before you opt for any of the flexi loans.