Personal Loan – Advantages & Disadvantages

Personal Loan – Advantages & Disadvantages

Personal Loan is a type of unsecured loan that is given to a consumer to cater to any of their personal needs like buying a vehicle, home appliances, marriage or for renovation etc. It is given after verifying your ability to pay, particularly the source of income and also as per your credit history.Personal loan as the name itself suggests are those loans which are given to individuals for personal use and they are given without any security, in case of home loans property is a security, in case of vehicle loan vehicle itself is security but in case of personal loan the individual himself or herself is security and the repayment of this type of loan is dependent only on the income of the individual. In short personal loan is an unsecured loan; let’s look at some of the advantages and disadvantages of personal loan.Some processing fee is charged and the amount according to your paying ability gets credited to your account. The payment of the loan is made through fixed installments including interest for a fixed period of time. Personal loans come handy these days. You do not have to go through tedious paper work and loads of formalities. Majority of banks and financial institutions provide personal loans. The interest rates are also quite reasonable and people often take a personal loan for purchasing purpose.
 
Advantages of Personal Loans:-The biggest advantage of personal loan is that it can be used for variety of purpose, unlike housing loans which can be used for only construction or purchase of house or vehicle loan which can be used only for purchasing of vehicle. For example, if an individual needs $5000 for marriage, $2000 for the renovation of a house and $1000 for other important expenditures then a personal loan of $8000 will solve all his or her problems.Another advantage of personal loan is that the whole process right from applying for loan to the documentation of loan and then disbursement of loan takes far less time then compared to other loans. Hence when one is in urgent need of funds then a personal loan is the best option.All type of loans requires collateral security but personal loans are exception and hence people who do not have any fixed assets with them and are unable to get any loan then personal loan comes to rescue for such people. In short lack of any requirement of collateral security gives personal loan another edge over other types of debts.

Easily Available:-Getting a personal loan is not a tough task. Personal loans are offered at reasonable interest rates by almost all banks and financial institutions. It is easy and convenient to get these loans in comparison to other types of loans.

No Agent or Middleman Involved:-In order to get a personal loan you do not have to approach a middle man or an agent. This avoids unnecessary delays and expenses. You can directly approach the bank or financial institution for the purpose.

Unsecured Loan:-As stated earlier, personal loan is an unsecured loan. There is no collateral security required in order to get this loan. All that is required is your ability to pay back the money. You are not required to mortgage any of your assets or provide for any kind of guarantee. One the lending institution become sure of your re-payment ability, they process the loan.

Less Processing Time:-As personal loans are available without any security or guarantee the processing time involved in getting it is also very less.  

All Purpose Loan:-Personal loan is such where it is not mandatory for you to specify the cause for which you are to use the money. You can use the amount credited in your name for any purpose. It is at your discretion to decide what you have to do with the money.

Minimum Paperwork:-Getting a personal loan does not require verification of any asset or any other kind of proofs and certificates that involve a lot of paperwork as none of your property is mortgaged.

Schemes and Offers:-Number of banks and financial institutions keep announcing special schemes and offers of personal loans for professionals like Chartered Accountants, Doctors and Architects etc.

Amount and Tenure:-Personal loans are offered ranging from Rs15K to Rs 20 lakhs varying from bank to bank. The repayment can be made through EMIs which is an option available. Loans tenure may depend upon the amount borrowed and may be from 12 months to 60 months. It is always advisable to opt for a personal loan instead of going in for borrowing cash from credit card as the interest rate is comparatively low for the first one.

Disadvantages of Personal Loans:-The biggest drawback of this type of loans is that they carry very high interest rate, since personal loan is unsecured in nature therefore lenders or banks charge higher rate of interest on these loans as compared to housing or vehicle loans.It is not easy to get this type of loan it is not like you will walk in the bank and bank will give you money, in order to get personal loan an individual needs to have good credit rating and good credit history hence this requirement regarding credit rating and history makes majority of individuals ineligible for personal loan.Another disadvantage of personal loan is that many banks and financial institutions do not allow part repayment of the loan which in turn results in debt getting bigger and bigger due to interest. So for example if you have taken $10000 personal loan and if you want to repay $1000 then bank will not allow such part repayment which is not the case with housing or other type of loans where the loan amount keeps getting reducing due to part repayment feature resulting in lower overall interest.

Qualification Criteria:-You need to qualify for a personal loan as per the guidelines of the bank and once you do that there is no delay. The guidelines vary from one bank to the other and the lenders do observe strict guidelines in this case as there is no collateral security.

Credit History:-It is mandatory for you to have a good credit history when you apply for a personal loan or else your application may get rejected. No lender would want a bad debt for the amount he lends. So prior to applying for your personal loan make sure you have a good credit history without any default in payments. It is advisable to apply for a personal loan with the bank in which you have an account or with which you share good rapport. Applying for a personal loan with a new bank or financial institution may result in more paperwork as they may call for detailed documentation and references for verification.

Bank Account:-It is mandatory for you to have a bank account if you wish to avail a personal loan. Not necessarily with the bank you are applying for.

Lender’s Risk:-As it is an unsecured loan, the risk is quite high for the lender because there is no collateral security or guarantee with them. If the borrower defaults payments then recovery of these loans prove to be very expensive and tedious.

If you are the one who owns a good credit history and have means to repay the amount borrowed with interest then you can easily get a personal loan for any purpose you require. If you do a bit of research you may be able to strike the best deal in terms of interest rates while you apply for your personal loan.

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