Pros and cons of personal loans: Is borrowing right for you? | Mint

Personal loans are one of the most sought after products in the field of finances, since they fulfil the need for instant money for any purpose. Personal loans can be rather beneficial and convenient at the same time as it has its advantages and on the other side it also has the risks which are briefly stated below. So here is the grid of the pros and cons of personal loans to help you make the best financial decisions.

What are personal loans?

A personal loan is a form of credit which does not require pledges or collateral to secure and which can help you fund a number of goals, from emergency medical bills, redecorating your house, going for vacation or paying off credit cards. It is performed in periodical instalments of a fixed amount for a definite number of months. Lenders and your credit score determine things like the interest rates of the loan, and how long it will take to pay off.

Pros of personal loan

1. Versatile use: This permits flexibility in the use of the funding, in a way that other loan forms discourage. They can practically be used for anything, meaning funding a vacation, purchasing technology, payment of school and even improving the house.

2. Customisable loan amount: Loan applicants have an opportunity to request the amount of funds, which he or she personally needs. Personal loans are usually repos which are meant to meet specific needs despite the fact that as much as lenders set caps depending on your income and your ability to repay.

3. Quickly approved and disbursed: Most of the NBFCs including the banks have emerged with some special techniques in their loan offering which can enable a loan to be approved within a day given that the various companies have been properly documented. Personal loans are ideal for any freaky situation since the rates are largely fixed.

4. No collateral required: One of the common types of loans is the personal loans, and what may interest you is, this does not need you to provide any security. This makes the procedure of applying easy and one does not have to have large assets in order to apply for the loan.

5. Minimal documentation: Most lenders simply require just identification documents such as proof of identification, address, and income. This helps to dispose of the problems relating to borrowers and also improves the approaches of the approval method.

6. Flexible tenure options: Through KYHS, the borrowers can select the frequency of payback ranging from one and five years. This flexibility helps to manage the monthly instalments/EMI’s and helps spread the repayment exactly over a convenient time-frame plan.

Cons of personal loans

1. High processing fees: Many lenders also re-oblige customers to pay a processing fee which ranges from a percentage of the amount loaned. They are larger than those for secured loans, thereby reducing the quantity of money you get in your hands.

2. High interest rates: Since personal loans are unsecured they attract higher interest rates. This may cause the cost to rise, especially for the average or poor credit customers in their tenure.

3. Strict eligibility rules: Most lenders have strict requirements like minimum income and excellent credit score. If the situation with your financial status is different, your loan application can be rejected.

4. Rigid repayment terms: Most of the lenders don’t allow you to alter the loan term or EMI even after fixing it. Any kind of advance payment or partial payments could lead to penalties while defaulting EMIs which in turn would deteriorate the financial status of the borrowers.

Conclusion

Personal loans can serve as a real answer to the short-time financial requirements, because they do not require collateral and allow you to borrow money quickly. However, if not well managed, it comes with high interest costs and stringent payback arrangements which make the instruments expensive.

One should look at the pros and cons of a personal loan, explore other funding options as well research other lenders and if the loan aligns with your long-term goal. Proper borrowing should always be pursued in a bid to maintain and achieve fiscal balance and reduce unnecessary borrowings.