Few pros and cons of Personal Loan

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Few pros and cons of Personal Loan
In case of a financial crisis, people generally tend to fall apart and in a haste whichever means of financing is readily available, they go for it. Personal loan is one such readily available unsecured financing option that can be secured after initial scrutiny by the lender concerning the potential borrower's repayment capacity and credit score.

Though some of the arguments work in the favour of personal finance, nonetheless the financing option has downsides as well.

Arguments in favour of personal loan

1. Ready availability: Similar to gold loan, personal loan can also be disbursed by the bank in one working day, if the borrower is done with all the documentation formalities. So, easy financing through the route in case of a financial exigency supersedes all other concerns.

2. Customized offerings: For increasing their loan book as well as to provide a good deal to their valuable customers, banks from time to time float such loan offerings that offer a comparatively better deal in respect of interest rates and other charges. Also, in respect of the quantum of funds that can be sourced through the route, there is no lower and upper limit, so depending on the requirement and corresponding check by the financial lender in respect of the eligibility, banks can disburse the personal loan.

3. Easy documentation and no collateral requirement: The loan that could be secured for financing  any of the needs requires completion of easy documentation process and the proofs of income together with address and ID proof are generally asked for by the bank. Also, as collateral is not tobe offered against the loan, in case of default, borrower is at a lower risk.

4. Loan tenure: Such a loan is financed for a comparably reasonable tenure of 1 to 5 years, so serving the EMIs is not troublesome.

Arguments against personal loan

1. Good credit report and repayment capacity prerequisites for availing personal loan: As such loans are not backed by any security, banks disburse such a loan only after the prospective borrower meets the eligibility requirement per se a good credit report and capacity of repayment of principal and loan amount.

2. Interest rates way higher in comparison to other financing options: The ready availability and unsecured nature of the loan is provided at a high cost. So, before plunging into such a deal, do a check in respect of the other cost-effective options as well as your capacity to serve the EMIs in time.

3. Prepayment or Part payment option not available: Unlike the other loan options, where the borrower is given the option to part-pay or prepay the outstanding loan amount, option of prepayment or part payment is not allowed by many of the financial institutions and so the borrower has to pay the dues till the term of the loan.

However, as suggested by experts, in case of dire need, such a financing facility should be resorted to for as short term as possible as then you'll not have to serve a high cost as interest rate for a longer duration. Nonetheless, this means requirement for you to serve a higher EMI or equated monthly installment.


Story first published: Thursday, March 6, 2014, 15:11 [IST]
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