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Business News/ Money / Personal Finance/  Personal loans pros and cons that you must be aware of
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Personal loans pros and cons that you must be aware of

There are pros and cons to taking out a personal loan that many borrowers often overlook. While these loans provide flexibility, it’s essential to compare interest rates, terms, and fees across various lenders before committing.

Personal loan pros and cons vary depending on the reasons for seeking this type of debt and various other factors.Premium
Personal loan pros and cons vary depending on the reasons for seeking this type of debt and various other factors.

A personal loan represents an unsecured borrowing arrangement available from institutions such as banks or credit unions. Essentially, it involves borrowing a specified lumpsum amount, which you then repay over a predetermined period, typically through fixed monthly installments accompanied by interest.

Getting a personal loan online offers a swift and convenient method to acquire funds. Begin by confirming your eligibility criteria such as minimum salary and credit score on the lender's website. Utilize online loan comparison platforms to assess interest rates, fees, and other conditions from various lenders. After selecting a suitable lender, proceed to their website to kickstart the online application process. Expect to furnish basic information, employment details, and proof of income. Additionally, be prepared to submit scanned copies of documents like your PAN card, salary slips, and bank statements as per the lender's requirements.

Characteristics of personal loans

The demand for immediate funds is a widespread challenge, whether it’s an unexpected medical emergency or an unplanned wedding. A personal loan provides an ideal solution for addressing the financial milestones in your life. Furthermore, there are numerous advantages to choosing a personal loan, some of which comprise:

  • Collateral-free: In contrast to certain loans such as auto loans, there is no requirement to offer collateral (such as a car or house) to meet the eligibility criteria.
  • Diverse applications: The funds can be utilised for nearly any personal expenditure, including consolidating debt, addressing unforeseen expenses, making home improvements, or facilitating significant purchases.
  • Stable interest rate: The personal loan interest rate remains constant for the entire duration of the loan, simplifying the budgeting process.
  • Loan duration: The usual repayment terms span from one to seven years.
  • Limited paperwork: In contrast to other loan types, personal loans usually demand less documentation for the application process.

The flip side of taking personal loans

Given that these loans lack collateral requirements, there is no necessity to pledge assets such as a car or house for eligibility. While this makes securing these loans more accessible compared to secured ones, it does entail a trade-off:

  • Increased interest rates: Due to the absence of collateral that lenders can claim in the event of default, personal loans generally incur higher interest rates when compared to secured loans such as mortgages or auto loans.
  • More stringent eligibility criteria: Despite the typically minimal documentation involved in personal loans, lenders might impose stricter conditions on your credit score and income to mitigate the risk associated with lending without collateral.

Frequently Asked Questions (FAQs)

Q. What purposes can a personal loan serve?

Personal loans present a versatile financial tool for a variety of purposes. However, it’s crucial to use them responsibly and explore alternative options, especially when dealing with high interest costs. Here are some typical uses for personal loans:

  • Consolidating debts: A commonly adopted purpose is debt consolidation, enabling the merging of multiple debts with higher interest rates (such as credit cards) into a single loan with a potentially lower interest rate. This streamlines the repayment process and may lead to long-term savings on interest.
  • Significant expenditures: Personal loans provide a means to finance substantial purchases such as appliances, furniture, or even a dream vacation. This allows you to distribute the cost over time through predictable monthly payments.
  • Home renovations: Utilising a personal loan can fund home improvements or repairs, enhancing your home’s comfort or boosting its overall value.
  • Unforeseen costs: Personal loans serve as a lifeline during unexpected emergencies such as car repairs, medical bills, or sudden household needs. They offer swift access to funds when immediate savings are not readily available.
  • Relocation expenses: Personal loans can assist in covering the costs associated with moving, whether it’s across town or the country. This includes expenses like transportation, rental deposits, or temporary housing costs.
  • Wedding expenditures: Utilising personal loans can aid in financing various wedding costs, including the venue, catering, photography, and attire. This enables you to distribute the financial burden over several months.
  • Educational costs: While not always advisable due to potentially high interest rates, personal loans can occasionally be employed to cover education expenses not addressed by grants or scholarships. Nevertheless, federal student loans usually provide superior interest rates and repayment options.

Q. Is the loan subject to foreclosure, and are there associated charges?

Foreclosure is contingent upon the complete settlement of all outstanding payments and charges. It is only permitted after fulfilling this requirement. While many banks typically do not impose fees for loan foreclosure, specific rules regarding charges may vary among different banks.

Q. Do the loan EMIs change with the change in employment?

It’s not obligatory, provided you consistently make timely EMI payments. Please inform your loan manager of any changes so they can effectively oversee your loan.

Q. What benefits come with applying for a personal loan online?

Through the online service, you can access real-time tracking for all transactions and monitor the status of your loan. Many banks and non-banking finance companies (NBFCs) provide this service to offer customers quicker information retrieval and to minimise email and call volumes.

Q. Can you apply for a joint personal loan?

Opting for a joint application with a co-applicant for a personal loan is advisable. This not only enhances your income eligibility but also enables you to qualify for a higher loan amount.

 

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Published: 05 Mar 2024, 01:39 PM IST
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