A personal loan is the money borrowed by an individual for his/her personal need. There may be many circumstances when you may need personal loan like medical emergency, marriage expanses, home repairs, vacation costs or any other unexpected situation. These loans are different from other type of loans such as education loan, home loan, vehicle loan, etc. which serve a specific purpose. Borrowing personal loan becomes inevitable in some situations. Sometimes the borrower need to decide whether to take personal loan or go for some other option. There are always some pros and cons of taking personal loans. Understanding these is necessary for the borrower so that he/she may take a right decision when such situation arise. Let us discuss pros and cons of borrowing personal loan in this post, but before moving further, let us know about the types of personal loans.
Types of Personal Loans
There are basically two types of personal loans, secured and unsecured. In a secured personal loan, the borrower has to pledge some type of collateral to borrow the money. The collateral may be the liquid assets like your saving account, fix deposits, or some fixed assets like your car, property, etc. If the borrower is unable to repay the loan amount, then the lender has a right to keep your collateral to satisfy the debt.
In an unsecured loan, there is no collateral required to borrow the loan. There are both types of personal loans offered by the banks and other financial institutions but the lenders consider unsecured loan riskier because there is no collateral available to recover the loan amount. Therefore, these unsecured loans are costlier then the secured loans. It means that the riskier will be the loan, interest rate will be more.
How You Can Apply for the Personal Loan?
As the personal loans are good source of income for banks and financial institutions, they make the application process very easy so that the borrower can easily avail the loan facility. Generally, you have to fill an application form to apply for a loan. The lender reviews the application and decides whether to approve or reject it. If your application is approved, then the next step is to fulfill other formalities like paperwork, etc.
When all the formalities are complete the lender funds the loan, generally by transferring loan amount to your bank account. You can use the money as per your requirements, afterwards. The repayment of loan is made as per the term and conditions of the loan agreement as agreed between lender and the borrower. Generally, there are standard terms of loan agreement and the borrower has to agree on them to get the loan.
Pros of Personal Loans
There are some advantages of personal loans which are described below:
Quick Availability of Fund
If you need fund quickly for your need, then the personal loan is right for you. In case of emergency it is suitable to take personal loan. Personal loan application and approval process is not complicated and you may get a loan in less than a week time. Even some lenders advertise same or next day funding.
Can Be Used for Any Purpose
Personal loan is different from other type of loans like car loan or house loan which is used for a specific purpose. There is no such restriction with personal loan. You can use it for any purpose like medical emergency, paying other debt, house repair, etc. A personal loan can be used for more than one purpose also. However, you should check with your lender on the approved uses before applying for the loan.
May Be Used to Consolidated Debts
If you have multiple loans running and credit card balances are pending to be paid, then you can use personal loan to streamline your finances by paying all other debts. Your number of payments will be reduced in this way to a single payment which is easier to remember and it will also result in a lower overall interest rate if your credit score is improved since paying out all other loans.
No Collateral Required
In most of the personal loans collateral in not required. But it is also to kept in mind that the unsecured loans come with higher interest rates and the criteria for qualifying for the loan is also tough.
Lump Sum Amount Available for Large Purchases
If you have to make a large purchase, then you can get a lump sum amount upfront to use that for the large purchase. You can make purchases now and pay for them over time, without saving money in advance. You should use this strategy for necessary purchase but it is dangerous if you use the loan amount for vacation purpose or luxury purchases.
Cons of Personal Loans
As personal loans have some advantages, there are some disadvantages also which are described below:
High Interest Rates
Personal loans have higher interest rates as compared to other type of loans such as home loan, car loan, etc. Therefor personal loan should only be taken in emergency situations or necessary spending when no other alternative is available.
High Fees and Penalties
Personal loans generally come with higher fees and penalties as compared to other type of loans, which may enhance your cost of borrowings. The processing fee for these loans normally is 0.5% to 2.5% of the loan amount, depending on the lender. If you miss the EMI payment, then the lender will also charge penalty which is usually higher in case of personal loans. For unsecured loans, these fees and penalties may even be higher.
Increase Debt Load
If you depend on the personal loans to fulfill your needs, then this may lead to unnecessary debt. Therefore, before borrowing money as personal loan, you should be assured whether this is necessary and go ahead if other options are not available.
Conclusion
Personal loans sometimes become unavoidable but there are a lot of disadvantages of taking personal loans. The cost of borrowing the personal loans is higher and it may create unnecessary burden of debt on you. Therefore, you should borrow the personal loans only in case of emergency situations and necessary spending. Make sure that no other option is available before taking the personal loan. Borrowing personal loan for vacations or luxury spending may be dangerous for your financial health.
Also read: Things to Keep in Mind Before Taking Education Loan
