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Pros and cons of personal loans

May 11, 2009 17:56 IST
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Need money in a hurry without having to go through tedious documentation processing? Want cash to fulfill your need without having to explain the reason for obtaining the loan? Then personal loans are your best ally.

You can get them easily in a period as short as 24 hours. All that is needed is to fill out an application form with the lender and the cheque would be delivered to your doorstep within a few days. In some cases, the amount may also be credited to your bank account (if you hold savings account with the lender).

However, before you rush out to get a personal loan, it is important for you to understand the pros and cons of personal loan, in order to make an informed decision.

Pros: Personal loans do offer you many benefits. Here are some of the most important ones.

Flexibility of use: Personal loans are multipurpose. They can be used for various different types of purposes, ranging from travel expenses, medical expenses , purchasing the latest jewellery to electronic gizmos or even house/car improvements.

Quick availability: Getting the personal loans is very fast. In some cases, you can get the loan even within 24 hours. So if you are looking for emergency funds, personal loans are your best bet.

Minimal documentation required: Normally, personal loans don't need much documentation, as compared to a home loan or car loan. Hence the processing time is quicker.

No collateral or security needed: No need for security is required to obtain this loan and the loan tenure is much shorter compared to home loan or car loan. This has less risk for the borrower comparatively, since if you are unable to repay the loan, your security is forfeited in case of other loans. As personal loans don't need any security, your assets are safe. This makes this kind of loan attractive to those who don't own any assets like car, home, shares, etc.

Cons: Despite their apparent attractiveness, personal loans do have their fair share of disadvantages. Prominent among them are:

High interest rates: As these loans don't need any security, they are regarded as high risk by the lenders. In order to offset their risks, these loans carry very high interest charges.

No part payments: Most lenders don't allow part payment of loans. This means you end up paying the loan for the entire tenure of the loan. It can work out quite expensive, since your initial installments go towards interest payments.

Need for good credit rating: As these loans are quite risky, most lenders insist on their borrowers having a good credit rating. So if your credit rating is poor, due to failure to pay any loan, your application will be rejected. Hence this loanĀ  availability is subject to strict eligibility norms based on credit worthiness.

Variable loan and interest as per your credit rating: Even those lenders, who offer loans to the borrowers with poor rating, end up offering lower principal amount and higher interest as compared to those given to borrowers with good rating. They also impose stricter repayment terms on these borrowers.

Should you go for it?

The answer depends on your circumstances. If you have a pressing need for cash, and don't have any assets, but own a credit card, a personal loan is certainly advisable.

This is because cash withdrawal using your card is far more expensive than a personal loan. But if you have assets like property, gold or shares, it is advisable to take a loan against these assets, since these loans have lower interest rates.

Also take into account your income, your other liabilities like home loan, other bills, and miscellaneous expenses. Also ensure you are able to honour your commitment, since failure to repay the loan will not only affect your credit rating but will also land you in legal trouble.

Lastly, decide if you can do away with the loan. While this loan may be useful in certain instances like medical emergencies, it doesn't make sense if you are using it to fund your vacations.

Hence it very important for you to weigh the pros and cons before apply for a personal loan.

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