• Personal Loan Pros and Cons

    Financial commitments can be hard to meet, given the increase in cost of living and stagnation of income. A quick solution to meet any monetary requirement is to take a loan, and while it might sound simple, the fact that banks and NBFCs offer multiple products for different purposes can confuse a borrower. We have specialised products which cater to particular requirements, but in most cases our requirements are generic, things which might not need a specialised product. A personal loan could be the most viable option in such cases, thanks to its “Jack of all trades” nature.

    Availing a personal loan is a huge commitment, one which requires dedication from our sides. While we might think that a personal loan is the answer to all our questions, there are certain aspects which should be considered, for a personal loan, like any other product, comes with a set of positives and negatives attached with it.

    Pros of a personal loan

    • Multipurpose – A personal loan is perhaps the best bet to finance our dreams, with lenders offering it for any legitimate purpose. Most other loan products are rigid when it comes to the use of money, but one can use a personal loan for anything they wish, be it to take a vacation, buy a new phone or TV, refurbish the house, pay tuition fees, throw a party, etc. This is the reason why a personal loan is often considered as the ‘Jack of all trades’.
    • Adequate loan quantum – Individuals can ask for an amount which satiates a particular requirement. While there is no fixed limit on the loan quantum, the actual amount can vary from case to case. Lenders are willing to pay the money which is quoted, subject to certain conditions.
    • Quick processing – A personal loan can be availed in a short period of time, with banks and NBFCs fast-tracking the process. It is possible for one to complete all formalities and get the loan sanctioned in a matter of a day (hours in some cases), provided that all the paperwork is in order. This makes a personal loan the best bet during emergencies or unforeseen events, with immediate financial relief available to eligible individuals.
    • No security requirements – Collateral or security can be a headache when it comes to availing a loan. Most lenders demand a collateral before sanctioning the money, which could make the process cumbersome and extended. A personal loan, however, doesn’t require security or collateral (in most cases). Eligible individuals can take the money without having to worry about offering security in exchange for it.
    • Simple documentation – Most lenders follow a simple pattern when it comes to documentation, trying to keep it minimal. This makes it easier for people to get the loan, with them expected to provide basic proof of identity, address and income in most cases. This helps in quick processing of applications, resulting in easier disbursal of loans.
    • Flexible term – The repayment of a personal loan isn’t hard, for borrowers can choose a term which suits their repayment needs. Terms ranging between 1 and 5 years are typically offered, with the ultimate decision on the borrower. This also helps spread the interest, reducing the burden of repaying a loan.

    Cons of personal loans

    • High processing fee – Most banks and NBFCs levy a processing fee which is a certain percentage of the loan amount. This fee is typically higher than the one charged towards a secured loan, which essentially means that a borrower gets a lower amount than requested.
    • High interest rate – Interest rates for personal loans are on the higher side, primarily due to the fact that they are unsecured. Typical interest rates range between 12 and 20% per annum, which are a good 2-3 percentage points higher than other loans. This could make loan repayment harder for individuals who do not have adequate resources.
    • Strict eligibility criteria – Lenders follow strict guidelines when it comes to eligibility criteria for personal loans. Most banks and NBFCs insist on a certain income level before considering an application. In addition to the income, the credit score of an applicant is also under scrutiny, with it possible for an application to be rejected on account of a poor/average score.
    • Repayment rigidity – While borrowers have flexibility in terms of choosing the repayment period, most lenders do not permit changes in this once it’s chosen. This means that one cannot prepay the loan or opt for part-payment, essentially having to pay the required amount for the entire duration. Also, failure to repay the EMIs on time could attract legal action, leading to complications.

    A personal loan can be a very smart option to overcome a particular financial need, but one should keep in mind the pros and cons associated with it in order to get the best results.

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