Pros and Cons of Personal Loans


Personal Loans are one of the easiest ways to get access to borrowed funds. Often they are used for varied and diverse purposes by the borrowers, which makes them a life saver in times of distress but also could lead to unnecessary borrowing or borrowing beyond capacity. Unlike many loans that are taken for a specific purpose these loans are just based on the desire or requirements of the applicants. So before taking a personal loan evaluate the pro and cons and also whether you do need a loan or not.

Pros of a Personal Loan: Here are a few advantages offered by personal loans:

Can be used for Various Purposes:  As stated above personal loans are not offered for a specific purpose.  There are times when you need funds but there are no loans available to cater to that specific requirement. A personal loan could come to your rescue in a medical emergency, for financing a loved one’s marriage, for education purpose if the borrower is not eligible for an education loan and many other such requirements.

Quick Processing: If you compare personal loans processing with quite a few other options you realize that it is much faster. If the borrower already has an existing relationship with the lender (a saving bank account etc) then the processing can be much more prompt; it is possible to get a personal loan within 24 hours too! Thus in an emergency such a loan could be the best bet.

Ease of Application: Not only is the processing time less but documentation required for personal loans is also much simpler than compared to a home or a car loan. Generally if the applicant meets the eligibility criteria and has a healthy credit score, getting these loans approved is not difficult.

Cheaper then Credit Cards: Personal loan offer an option of getting access to funds which is cheaper than credit cards. Thus if you need a not so big amount and are planning to borrow on your credit card then you could easily consider the option of small personal loans which is much more economical.

Cons of a Personal Loan: All is not rosy and pink; here are a few disadvantages of personal loans:

High Interest Rates: Since these loans are unsecured, banks have nothing to fall back upon in case of a default which makes them high risk loan from the perspective of the lender. To compensate for the high risk lenders charge high interest on these loans; these loan are much more expensive then car, home or education loans.

Part Payment or Pre-payment is discouraged: Even if the borrower has surplus funds and wants to make a partial payment or a complete payment before the end of the term he is often discouraged to do so by the conditions imposed. Usually pre-payment or part payment is not allowed and if it is allowed then there is some penalty imposed on the borrower.

A High CIBIL Score is required: Absence of any collateral makes it important for the lenders to be sure about who they sanction the loan to. Thus banks have stringent eligibility criteria for personal loans and they are unwilling to lend to anybody who has a low CIBIL score. A low credit score is an indicator of irresponsible credit behavior in the past and banks do not want to take the risk of lending to someone who has a bad credit history. So if you do not have a good CIBIL score you may find it tough to get a personal loan.

Is Susceptible to Misuse: The flexibility of use and ease of application often makes these loans susceptible to misuse. So whether it an overseas vacation dream or a fancy gadget all can be bought with a personal loan. This may encourage borrowing more than one can repay or splurging by the applicant. Obviously the onus is on the borrower to be prudent about why and how much to borrow.

Any kind of loan has to be repaid; this is an underline fact that must never be forgotten. If one is unwilling to take a personal loan, there are other options like loan against gold/deposits/securities etc that could be explored. However if taking a personal loan compare options and understand all terms and conditions well before signing the loan agreement.