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Personal loans are probably the fastest and most easily available of retail
loan products. They are, however, costlier than other loans, such as home loans,
loans against property, or loans against shares.
The Pros
Unlike other retail loan
products such as home loans or loans against property, you don't need to
produce any collateral or security to avail a personal loan. The paper work is also minimal compared to
other loans; making the loan processing quicker. You also do not have to
specify the end use of the money while taking a personal loan. All the lender
is interested in is whether you are capable of paying the EMIs every month on
or before the due date. Getting a personal loan is cheaper
than borrowing on your credit card. So,
if you have run up a huge outstanding amount on your credit card and the
accumulated interest is making it almost impossible to clear your outstanding, a
personal loan might be the way to go. What you do here is use money borrowed at
a lower interest rate (the personal loan) to pay off money borrowed at a higher
rate (outstanding amount on the credit card).
The Cons
Since banks perceive higher
risk in this category, many follow a list of approved categories of borrowers. If
your profile doesn't match up to any of these pre-approved categories, your
loan application will be rejected.
- The interest rate of personal
loan can be high; sometimes double that of home loans, especially if your
credit profile is weak.
Quick tips
Before you consider taking a personal loan, take a look at
these tips:
Interest rates on personal
loans vary wildly from bank to bank and are based primarily on the customer
profile. For instance, an employee of a multinational company may get a personal
loan at 12%, while a self-employed person gets it at 24%. You should ensure
that you get the best deal for your profile. Read the fine print. Look out
for foreclosure charges, service charges, and any other hidden charges.
Prepayment fee or foreclosure charges on a personal loan can be as high as 5%. Scrutinise offerings
carefully and always compare rates offered by other banks.
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