Personal loans are one of the most widely used financial products, providing the flexibility and convenience of being used for various financial needs, including funding vacations, medical expenses, and so on. The recent rise of personal loan apps has made it even easier to get such loans since many lenders have started offering instant approval and disbursal through such platforms. Personal loans also have various benefits, like the absence of the need for collateral, and they involve simple documentation; however, drawbacks include high interest rates and processing fees. A person needs to weigh both these pros and cons before taking the loan. Then the only goal is to ascertain whether or not the personal loan will fit the financial plan. In this article, we learn about personal loans, and their pros and cons.
What is a Personal Loan?
A personal loan is an unsecured financial product from which one borrows a lump sum of funds from a lender without any requirement for collateral. One can use it for various reasons, such as home renovation funding, debt consolidation, or to address unexpected expenses. Personal loans normally have a fixed repayment schedule wherein the amount of the loan, including interest, is to be paid through equated monthly installments over a given period. The interest on personal loans differs from borrower to borrower depending upon the creditworthiness and the profile of the applicant.
Advantages of a Personal Loan
The following are some of the key benefits of personal loans:
- Multipurpose Utilisation: One of the most important advantages of personal loans is their flexibility. Such loans can be utilised for any particular legitimate use, like funding a holiday, buying electronics, renovating a house, education, or even for a celebration. Thus, this reason is why personal loans are called the ‘Jack of all trades’ in the lending world.
- Adequate Loan Amounts: Borrowers can request an amount that meets their specific financial needs. There is no fixed limit on the loan amount, but lenders assess each application individually and may approve amounts based on various factors such as income and creditworthiness.
- Quick Processing: Personal loans are known for quick processing. Many banks and NBFCs accelerate the process, and the individual can complete all formalities and get his funds within a day or even hours if all the documentation is proper. This feature makes personal loans especially attractive in emergencies or other unexpected financial situations.
- No Collateral Required: Personal loans are usually unsecured, meaning that they do not require collateral. This implies that the borrower does not need to provide any assets as security for the loan. This makes the borrowing process easier and more accessible to individuals who may not have valuable assets to pledge.
- Simple Documentation: The process of documenting personal loans is relatively simple. Most lenders request minimal documentation; this includes evidence of identity, proof of residency, and a statement of income. This allows for faster application processing and quicker disbursal of loans.
- Flexible Repayment Terms: Personal loans allow borrowers to choose flexible repayment terms based on their financial situation. A typical repayment period ranges from one to five years, which allows borrowers to spread their payments and effectively manage their finances.
Disadvantages of Personal Loans
The following are some of the disadvantages associated with personal loans:
- High Processing Fees: Many banks and NBFCs charge a processing fee for personal loans, which is usually a percentage of the loan amount. This fee can be higher than those associated with secured loans, resulting in borrowers receiving less than the requested amount after fees are deducted.
- High Interest Rates: The interest rates for personal loans are usually higher than those of secured loans since they are unsecured. It is usually between 12% and 20% per annum, which might be a problem for people with fewer financial resources.
- Strict Eligibility Requirements: Personal loan lenders often place stringent eligibility criteria. Applicants have to meet minimum income requirements and show a satisfactory credit score. Therefore, a person with bad or average credit scores will be hard-pressed to get personal loans approved.
- Repayment Rigidity: After the terms have been chosen for repayment, there is not much flexibility to make changes with most lenders. As a result, borrowers are stuck with no opportunity to prepay or even partially pay the loans without suffering a penalty. Even delayed repayments might attract legal repercussions.
Conclusion
A personal loan is effective in fulfilling any urgent short-term needs; however, the advantages and disadvantages must be carefully thought of before deciding to take it. Understanding how a personal loan works and evaluating one's financial position before borrowing is what makes you come up with decisions that help meet your objectives. The interest rates and terms between various lenders are easy to compare nowadays with a personal loan app. Always try different alternatives through the application to ensure that you choose the most appropriate loan offer with the most favourable rates and conditions suitable for your financial needs.
