Be it goods or services, the price of everything is increasing a lot today. There are situations where people really need money and they do not have enough, at such times they choose to take a loan from their bank. For example – A wedding. In a country like India, where weddings are so expensive, people need money and a lot of them choose to take loans from the banks by giving some asset of theirs as security. Such type of loan is called the traditional loan wherein people pledge an asset as collateral security when they borrow money from a financial institution.
Credit products have been immensely popular funding options for decades. The two most popular and widely used options under credit products are personal loans and credit cards. Both these options come with their own set of advantages and flaws. When you are in need of cash, choosing a credit product will depend not only on what you need the funds for, but also on the repayment term that you are comfortable with. Personal loans are typically unsecured loans offered by lenders which allow you to borrow money to take care of personal financial requirements.
People today prefer to take personal loans instead of traditional loans as it does not require any collateral security. Say, you want to go on a trip after continuously working for six months. You choose the place and prepare the plan, but when you look at the high rates of air tickets, you are forced to postpone your plan. In such a case, a lot of people, today, take a personal loan from their banks to pay for their travel and repay it later, in instalments. This way they get to travel to their desired location and not worry about losing any asset either.
Some people think that there is no difference between traditional and personal loans, but it is not so. Traditional loans are secured loans while personal loans come under the category of unsecured loans. In traditional loans, when a borrower takes a loan from the bank and fails to repay the money, the bank takes over his collateral security. In personal loans, people do not have to worry about losing their assets (house or car) while borrowing money from the bank. The banks look at the credit history and reports of a person before giving him a personal loan. Based on his credit history, the bank decides a rate of interest and the amount it will lend him.
Features of a Personal Loan
Rate of Interest
The rate of interest for a personal loan can be floating or fixed. It typically ranges from 10.50% to 25%. Some lenders also offer an arrangement wherein the borrower is charged interest only on the loan amount that they withdraw for use. The rest of the loan amount remaining unused in their loan account does not attract interest.
The repayment tenure for a personal loan usually extends for up to 5 years. Some lenders may also allow for a 6-year repayment period on their personal loan product. The repayment period is also very flexible with private lenders such as Money View as they lend money based on the specific needs of the borrowers.
A personal loan is disbursed in lump sum once it has been approved by the lender. Customers can apply for the loan online these days through a paperless approval process. They can also check their eligibility before applying for the loan. Once the application is submitted it can even be processed within a day and the applicant can get money directly to their bank account.
Personal loans, because they provide a higher quantum of loan, are ideal big-ticket purchases and expenses like funding a vacation, medical emergencies, arranging a social gathering, home renovation, etc. They are also ideal for larger debt consolidation.
What are the Pros and Cons of Taking a Personal Loan?
A personal loan is truly personal in nature as you do not need a specific reason for taking it. To take traditional loans, you need a specific reason. For example – you need the loan to buy a house. Another issue with traditional loans is the painful process of paperwork. There are forms which you have to fill and sign in person. A personal loan, on the other hand, is easy to apply for as it has a very brief application. Some financiers provide personal loans within one or two working days and require only an e- signature.
A personal loan is not always about borrowing money from a bank. A lot of people get scared hearing the word ‘bank’ as it makes them remember all their liabilities. Some people do not trust banks and try to find other sources for getting a loan. One recent trend is peer-to-peer lending also known as P2P lending. There are companies which have started this new personal loan business wherein borrowers list their loan requirements and investors (an individual or company) supply funds until the total amount is received by the borrower.
As everything has two sides to it, good and bad, a personal loan also has its advantages as well as disadvantages. If a person applying for a personal loan does not have a good credit score, it is very likely that he will have to pay a very high rate of interest. Lenders also provide this loan after checking the credit history, so if a person has a bad credit history, they will think before lending money to him. A lot of companies deny loans to people with bad or no credit history. There are also hidden fees which one should find out about, before taking a personal loan. For example- prepayment fee. Prepayment fee is charged when a person decides to pay his loan early. These are a few disadvantages of a personal loan.
Personal loans come with a fixed repayment period, which means your debt does not extend beyond the repayment date. Considering the lower interest rates, it can be a more economical borrowing option in the long-term. Since a fixed amount is provided under the loan, there is no scope to overspend. Part repayment of a personal loan can only begin after a certain period following loan disbursal. A fee may also be charged for part-prepayment of a personal loan. The application process for a personal loan can be time consuming. When it comes to borrowing funds, it is important to not just assess your requirements before approaching a lender, but also to weigh the pros and cons of all available options before considering one.
Apart from the advantages mentioned above, a personal loan has one more benefit related to its rate of interest. The rate of interest on a personal loan is fixed in most cases. So, a person can plan the repayment process of his loan in advance.
Looking at all the pros and cons, a personal loan seems to be a better option than a traditional loan in many ways and easier to apply for. Today a lot of banks and financial institutions provide personal loans. One can check their websites to find out more information on the same.