Personal loans can be of great help in certain situations. In an event of medical emergency, high debt accumulation, or payment of higher education tuition, a personal loan can prove to be a saviour. When your friends and family are unable to support you financially, a personal loan becomes your last resort. However, is taking a personal loan always a good idea? The answer is- “No”. On the surface a personal loan may seem like a good option when you need a lot of cash in a short period of time, but in reality it does have its own drawbacks.
Before you take a personal loan it helps to know what are its advantages and disadvantages, or the pros and the cons.
Pros of a Personal Loan
- Multiple Uses: One of the best advantages of instant personal loans is that you don’t have to explain yourself to your lender why you need one. While a home loan can only be taken for purchasing real estate, and a car loan for purchasing a car, a personal loan can be obtained for almost anything, as long the reasons don’t conflict with the law. The name says it all- “personal” loan. So, whether you need to fund an important foreign trip, or just need money to manage your expenses, you are free to apply for a personal loan.
- No Security Needed: Personal loans are generally unsecured. In other words- you don’t have to provide collateral, such as property, or a car to apply for a personal loan. This makes the process very convenient and simple.
- A Way to Improve Credit Score
Other than credit cards, private personal loans are also a good way to increase credit score. You can take small personal loans which are easy to manage, and make payments on time to see the benefits on your credit score. If you don’t have a credit history at all then also a personal loan can come in handy. It is a safe way to start a promising credit history, and establish high creditworthiness.
- Debt Clearance
If huge debt has cornered you, then you can take a personal loan to get rid of it almost instantly. The interest rate on a personal loan is usually small, and manageable. If you have debts from multiple accounts, such as from some other loan, and credit card debts, then you can cover them all with just one personal loan. Once you have cleared all debts you are left with just one major debt, that of the personal loan, which will be easier to deal with.
Cons of a Personal Loan
- High Interest Rates: One major con of a personal loan is high interest rate. This is because personal loans are essentially unsecured loans. So, a home loan will come with a lower interest rate in comparison to a personal loan. This is because a home loan is secured loan, and the lender has the property to take as collateral. In case the loanee defaults in the future, and lender can get their money back by selling off the property. However, in a personal loan it is not possible, and the risk is higher. This is balanced by making the rate of interest higher.
- Stricter Qualifying Criteria: This is related to the previous point. Since the risk is high in a personal loan, lenders don’t approve the applications for the same easily. The eligibility criteria for a personal is much more stringent than other kinds of loans. You may have to do a lot of work to improve CIBIL score first, before you can apply for loans.
While this is not a drawback of a personal loan, but needs to be noted still- you have to be careful when you mull over the idea of getting a personal loan. Many people get personal loans for wrong reasons. Examples include- lavish weddings, long overseas trips, etc. Personal loans should only be applied for when it is absolutely necessary and you are unable to get the money by any other means. This is because the interest rates of personal rates can be high, and can add woes to your life easily.