3 Advantages vs. Disadvantages of Personal Loan

Personal-Loan-Traits

 

Introduction

Personal loans are loans provided to salaried individuals for personal use. Lenders provide these loans without any security or collateral hence they are also called unsecured loans. Interest rates offered on these loans are usually high because of the absence of collateral. Lenders also charge a processing fee.

Ideal for short term cash requirements, personal loans are availed quicker via digital lending solutions compared to traditional lending solutions like banks. Digital lending provides online personal loans for salaried professionals at a faster disbursal rate and with minimal documentation.

The repayment of a personal loan depends on your income and repayment capability. The payment for the personal loan is done through fixed monthly installments called EMIs (Equated Monthly Installments).

From the lenders’s perspective, if you are a salaried professional, there is low risk of default because you have a steady flow of income coming in each month to pay your EMIs. When considering loan applications, lenders decide the loan amount based on your city of residence. Borrowers need to maintain an average living expense depending on the type of city.  Typically, in tier 2 or tier 3 cities, most borrowers opt for a personal loan between Rs.50.000 to Rs. 1 lakh. In comparison, loan requests in tier 1 cities or metros range between Rs.1lakh and Rs.3 lakh.

When looking for a personal loan keep in mind parameters such as personal loan eligibility and loan approval time. Also ask yourself, is the personal loan absolutely necessary? Are you capable of paying the EMIs on time? Is your salary enough to leave you with sufficient for your personal expenses plus the EMIs per month?

Weigh the pros and cons of taking a personal loan carefully:

 

Advantages

1.  It is unsecured

As mentioned at the start, personal loan is an unsecured loan. No mortgage of assets or guarantee is required for personal loans. Basically personal loans have an edge over other types of loans because even if you don’t have any fixed assets to apply, a personal loan can come to your rescue in times of need.

 

2. It is availed easily

Offered by almost all banks or financial institutions, minimal paperwork and verification time required towards checking the documentation make applying for a personal loan quick and simple.

The entire process from application to disbursement takes much lesser time compared to other loan segments, making them a preferred source for emergency funding.

 

3. Available for all purposes

It is not mandatory to specify the purpose or the cause when applying for a personal loan. Unlike housing loans where you can use the amount credited for only construction or purchase of a house and vehicle loans which can be only used for purchasing a vehicle, personal loans can be used for multiple purposes.

Salaried professionals usually apply for a personal loan for purchasing household appliances, purchasing electronic gadgets, holiday travel, marriage expenses, home improvement or renovation, relocation or medical expenses.

Personal-Loan-Traits

 

Disadvantages

1. Requires credit history

A good credit history is mandatory in order to avail a personal loan. As there is no collateral required, banks rely heavily on your credit history to understand your repayment behavior. So prior to applying for a personal loan you need to make sure you have a good credit history without any defaults towards credit card payments, past loan EMIs etc. A poor credit history is responsible for many a rejection.

It is better, though not necessary, to apply for a personal loan at a bank where you already have an account. Applying for a personal loan with a new bank could mean more paperwork with references and detailed documentation.

 

2. Interest rates are usually high

Banks charge high interest rates on personal loans as compared to vehicle or housing loans.

With personal loans not needing any collateral, they are regarded as high risk loans by the banks. In order to offset the risks involved, banks charge high interest rates for personal loans.

Banks who do allow prepayment charge a penalty to cover their loss of interest earnings.

 

3. Part payments not allowed

Most banks or lending institutions do not allow part payments for personal loans. This means you end up paying off the loan for the entire tenure. This can work out to make it very expensive since the initial EMIs go towards repaying the interest itself.

The guidelines for personal loans vary from bank to bank. Although the guidelines are strict in order to negate the absence of collateral, banks sometimes offer personal loans to individuals who have a poorer credit bureau score. The repayment terms for such individuals is stricter and are provided loans with lower principal amount at higher interest rates.

 Personal-Loan-Traits

 

When not to avail a personal loan:

  • To pay off credit card debts
  • For gambling
  • To invest in the stock market
  • To lend the funds to others

A personal loan comes with a responsibility to repay the EMIs on time and clear off the loan at the earliest. This also helps maintain a good credit score.

 

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