Should You Use COVID Loans? 5 Things You Should Know Before Applying for a COVID-19 Loan

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COVID-19 Loan for Personal Use

Special personal loan schemes offered by banks during the COVID-19 crisis.

Governments all over the world are struggling with the finding the right strategies to deal with the COVID-19 pandemic. Initially, a complete or partial lockdown seemed to be the right option to curb the infections from spreading but it ended up affecting the global economy badly. Relaxing the lockdown restrictions has resulted in a strong surge in coronavirus infections all over the world. Whether lockdowns are imposed again or not, there is no denying the fact that the financial aftermath of COVID-19 will be felt for years to come. And, this is based on the belief that the crisis will end in the near future, as unrealistic as it sounds at present.

The Finance Minister of India announced some relief measures to help people and businesses deal with the economic crisis arising out of the COVID-19 pandemic way back in March 2020. These included the waiver of ATM withdrawal charges, no minimum balance fees for savings accounts, a 3-month moratorium extension on loan EMIs, an extension of date for filing ITR, reduction in repo rate, etc. in addition to special loan schemes called COVID-19 loans for businesses and retail customers.

What are COVID-19 Loans?

Most public sector banks in India are offering COVID loans to their retail and corporate customers. These special short-term loan schemes are divided into two categories:

  • COVID Loans for personal use meant for retail customers and
  • COVID Loans for businesses meant for MSME/Corporate customers

The COVID-19 personal loans are offered as low-interest personal loans to meet the financial needs of individuals. The COVID-19 business loans are offered to meet the working capital needs of a business and are usually labelled as Emergency Credit Line schemes.

Now that you know what COVID-19 loans are, you might be wondering about the eligibility criteria for the loans and loan application process.

Features of COVID-19 Personal Loans

If you are interested in checking out individual COVID loans offered by each bank, please check out our COVID-19 Loan Scheme page. Here are a few common features of COVID-19 personal loans:

  • Retail customers with a minimum of 6-month relationship with the bank are eligible for this loan. Some banks offer COVID-19 Personal Loans only to their existing home loan/personal loan borrowers while others also extend it to savings bank account holders drawing salary through the bank
  • The borrowers must have a good credit rating and an impeccable repayment record on loans
  • These loans are usually offered at a low-interest rate as compared to general personal loan schemes. The interest rate currently applicable to these loans may range from 7% to 11%
  • Borrowers can apply for COVID loans online on the chosen bank’s website
  • The maximum loan amount sanctioned under this scheme is capped at Rs. 3 lakh for most Indian banks. The actual loan amount sanctioned by the bank depends on the repayment capacity of the borrower
  • The loan repayment period for these loans may range from 1 year to 3 years

If these features have made you contemplate applying for a COVID-19 loan, let us tell you that it is not the right fit for everyone. There are a few things you must take into consideration seriously before applying for a COVID-19 loan:

#1 COVID Loans Can Seem Enticing.

One of the main reasons why people are tempted to apply for a COVID loan (if they are eligible) is that it is offered at a lower interest rate. However, this should not be the sole criteria to avail a loan. You must weigh your options to see if applying for a new loan is a wise choice which ties up with our next point.

#2 COVID Loans are a Liability.

Availing a new loan means taking up a new liability. In an already uncertain economy and tight budgets, do you think taking on a new loan is a smart option? Experts claim it can be if you use to pay off a different high-interest loan or credit card debt.

#3 COVID Loans are a Short-term Solution to Your Problems.

Repayment of a COVID loan will put an added burden on your finances in the future. Whether you are self-employed or a salaried employee, you cannot be sure of how things will pan out in the near future especially since the pandemic itself has showed no signs of going away soon. If your income takes a hit in the coming months, will you be able to repay the loan comfortably? Choosing to liquidate an investment instead of taking up a new loan may be a better alternative.

#4 Pay off your Obligations to Avoid Penalties and Extra Charges.

A famous quote says that “The best time to plant a tree was twenty years ago and the next best time is now.” The same may not be true for savings in the times of COVID-19. Many experts believe that it is better to pay off debts and clearing your dues at this time instead of taking up a new loan or continue on your saving option. This is not the best time to start an emergency fund either. It is time to play safe. This is probably why opting for an extension of loan moratorium, currently offered by banks, is not considered wise if you can pay off the EMI. This is because it will only increase the amount of money you need to pay back later as this is only for temporary relief. This brings us to our last and final point.

#5 Choose Between Debt Repayment and Building an Emergency Fund Wisely.

As discussed above, you cannot blindly apply for the COVID-19 loan just because you are eligible for it or completely liquidate your investments to pay off your loans with nothing saved for a rainy day. The general rule of thumb is that if the interest rate on your debts is high, consider paying them off instead of focusing on your savings and if the interest rate is low then focus on building an emergency fund for the future.

Frequently Asked Questions (FAQs) about COVID Loans

Q. Do COVID Loans Need to be Repaid?

A. Yes, it is like any other lending schemes offered by Indian banks like personal loans, home loans, etc. If you fail to repay the COVID-19 loan, then it attracts a penalty from the bank depending on the extant laws and affects your credit score.

Q. Are COVID Loans Forgiven?

A. The straight-forward answer is, No.

If you have been following COVID-19 Loans news in India, you might have heard of “forgivable” loans. They are not available in India. These loans are only offered in the US under the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) category. A portion of the loan is forgiven based on terms and conditions set by the lender at the time of loan application. It is important to note here that partial or full loan “forgiveness” is provided depending on a case-to-case basis.

Q: Are COVID Loans Taxable?

A. COVID Loans are offered as soft loans by banks to their customers. Some relaxation in taxation on COVID loans was announced but the exact details are not available as of now. Please get in touch with a bank representative for your tax queries on COVID loans.

Let us know if you have any more questions about COVID loans and we will try to answer them in

upcoming posts.

Q. What is the Last Date for COVID-19 Loan Application?

A. When they were first announced, the last date to avail the COVID-19 personal loans from most India banks was set to 30th June 2020. However, the dates have been tentatively extended till the 30th September 2020.

If you want to start handling your money responsibly so that you never have to deal with cash crunch despite the economic ups and downs, we have recently launched a Personal Finance Programme for you. It helps you learn how you deal with your money based on your “Money Personality”. We have designed a “Personality & Money” questionnaire, which helps us give you personalised saving and investment advice to help you become wealthy. Watch our Personality & Money video here.

Disclaimer: This article is for informational purposes only. All details provided here are correct as on the

publishing date of this post. The laws are changing fast because of the deepening financial crisis caused

by the COVID-19 pandemic and information may change. Please check with the bank and other official sources before taking any investment or related decisions.

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