If you have been considering taking a personal loan for some time now, then the chances are high that you came across the term personal loan at least once. While the concept of a personal loan is not exactly new in India, it is agreeable that the concept has been gaining traction in the last few years thanks to the many startups which now specialize in giving out personal loans at low rates of interest and also offer flexible repayment plans.
But one common question that is sure to ponder your mind before you take a personal loan is its pros and cons, and that is exactly what we will be discussing in today’s article. So without further ado, let’s get started.
What Are Personal Loans?
Before we dive into the intricacies of the pros and cons of personal loans, it is important that we have a concrete understanding of what a personal loan is.
In simple terms, a personal loan can be understood as a financial instrument through which you can borrow any amount between ₹10,000 all the way ₹25 lakhs while enjoying a significantly lower rate of interest, flexible repayment plans, and most importantly immediate approvals.
One of the main differences between a personal loan and a traditional loan in India is the fact that while traditional loans require you to pledge any asset or put forward collateral in order to get approved for the loan, in most cases, you won’t be required to put forward any form of collateral in order to get a personal loan. While this is a minor point at first, if you delve more into its intricacies, you will come to realize that this is one of the main reasons why personal loans are becoming popular every passing day.
Personal Loans: Pros and Cons
Now that we have a better understanding of the meaning of a personal loan let us understand each of its pros and cons better.
Pros of Personal Loans
Right at the surface level, personal loans have a variety of pros as compared to traditional loans. Some of the most significant ones are as mentioned below:
One of the first and most important advantages of a personal loan is the fact that they are versatile. While most traditional loans in the market have a fixed motive attached to them, such as car loans, home loans, medical loans, and so on, you as the borrower have the option of using the loan amount from a personal loan for any spending purpose.
Along with this, you do not need to inform the lender of your spending motive when you are applying for a personal loan, thus opening the door to even more opportunities.
Lowest Rates of Interest
As compared to traditional loans in the market which arrive with a very high rate of interest, most personal loans offer some of the lowest interest rates in the market. For example, Money View, which is a pioneer in the field of personal loans, offers an interest rate of 1.13% on its personal loans along with instant disbursal.
Having to pay a lower interest rate, directly means that you will save more money in the long run, thus reducing your overall financial stress.
Flexible Repayment Plans
Another advantage of personal loans lies in the fact that they arrive with flexible repayment plans. When you take a traditional loan in India, most lenders will fix a date along with the amount you are required to pay (in the form of EMI) every month. If you miss this payment date or fail to pay the due amount, there are backlashes usually in the form of high fees.
On the other hand, in the case of personal loans you have the option to decide the EMI amount you would like to pay every month along with the date on which you would like to pay the said amount. This feature not only equips you with a higher rate of flexibility but also makes sure that you can easily avoid a debt trap and also reduce your overall financial stress.
Cons of Personal Loans
Now that we have taken a look at some of the advantages of personal loans let us better understand some of its most significant disadvantages.
Most people have the mindset of using a personal loan for debt consolidation, or in other words to pay back their existing debts. But while personal loans will be able to help you pay back your previous debts, you are still technically in debt to the personal loan lender, thus increasing the chances of falling into a debt trap.
Along with this, if you are not careful as well as mindful of both your borrowing as well as spending habits, shortly there will arrive a day when the pit of a debt trap will literally become bottomless and a never-ending cycle.
A lesser-known fact about personal loans is that most of them arrive with a prepayment penalty. This means that if you pay your dues before the due date, the lender will charge you a significant fee in order to close your account. While this move makes sense for the lender, as they are trying to cut back and recover their losses caused due to early payment, when you look at it from a borrower’s perspective, it is quite expensive and disastrous.
Scams Are Abundant
Last but not least is the fact that there are a number of scams that originate from personal loans. Since this domain is relatively new in India as compared to some of the more traditional loans, scammers target individuals who are desperate for a personal loan and cheat them of their money.
In order to avoid this, always be wary of the fact that if an offer appears to be good to be true, then it generally isn’t.
Just like everything else in life, personal loans have both advantages and disadvantages. As a borrower, it is your responsibility that you carefully analyze both of them and then depending on your exact needs, come to a decision of applying for a personal loan or not. All the best!