Unlike collateral loans, a personal loan enables you to borrow funds only on the basis of your financial history. You have to ensure the lender that you are a reliable person, and they will provide you with the required money. Where this seems beneficial, there are some drawbacks to it as well. Therefore, you need to study it carefully before you apply for a personal loan.
Pros of Personal Loans:
For a collateral loan, you need to own some assets beforehand. You can’t get those loans if you can’t keep an asset as security. On the flip side, there is no such hassle in personal loanapply. You can easily get a personal loan by showing your good credit history to the lender.
As there is no collateral involved, the overall processing time of personal loans is much less than other types of loans. So, you can even apply for them during emergencies.
A minimal number of documents required for personal loan. This generally involves identity proof, income proof, etc. The less number of documents further reduce the processing time of the loan. Thus, you won’t have much trouble getting the funds.
Based on your financial circumstances, the borrowable amount can be bigger or smaller. Contrastingly, there is no specific limit to the principal amount of the loans. Therefore, you can quickly get more considerable funds to fulfil all your needs.
The most interesting factor about personal loans is that they are versatile in terms of usage. The lender doesn’t restrict you from using the funds for the purpose you have taken the loan for. You can use them for purposes, such as:
- Medical bills
- Debt consolidation
- Dream vacation
- Car repairs
- Starting or expanding a business
Cons of Personal Loans:
Clean Credit History
The most reliable way of examining your sincerity towards finances is by checking your credit report. Therefore, lenders demand the score and report before approving the loan. You need to maintain the credit score high if you want personal loan processing to be convenient. In case you have messed up with credit in history, you may not get the funds. Even if you do, you will have to cope with the lower principal amounts and higher interest rates.
High Processing Charges
Usually, lenders associate a high processing fee with personal loans as compared to other loans. So, you will receive a lower amount from what you applied for.
You can’t prepay the personal loans or make partial payments during the term. The only option is the pay the regular EMIs for the entire tenure. You may find repayment flexibility with some of the lenders, but they won’t allow you to change the options once you choose them.
There are various risks associated with personal loans. For example, you can get trapped in a cycle of debts. As the funds are convenient to obtain, they can easily get you stuck with significant balances.
Higher Interest Rates
Due to a lack of collateral, personal loan interest rates are generally higher than other loans. This accounts for the risk that the lender takes by providing you no-security money. Though the interest rates have improved over time, they still haven’t matched other loans’ rates.
Now that you know all the pros and cons of personal loans, you can decide for yourself. A personal loan can’t be categorized as good or bad. It solely depends on your circumstances and requirements, whether you opt for it or not. But you must keep all these points in mind before making a decision.