The Good And The Bad Things About Personal Loans

Kolkata, November 29: There are times when you need emergency funds for various reasons. These could be a medical requirement or planning for a holiday or a marriage or for home renovation. There are two ways to deal with the situation, either dig into your personal savings or avail a personal loan.

There are several things that work for a personal loan. Let us take a look. 

Easy to get

The only factor for availing a personal loan, you need a regular income. Your existing bank will have a pre-approved offer ready for you. And if you put in a query, almost every bank will be eager to give you a personal loan. 

You can go to the website of any lender and check your personal loan eligibility in less than a minute by entering a few basic details. You can get a personal loan of an amount between Rs 75,000 to Rs 15 lakh and above based on your income. 

Require minimal documentation 

The documents required to get a personal loan are pretty simple. You need your KYC documents regarding identity, address and income proof. Also, you need to fill up an application form. That is pretty much it. 

Do not require any collateral 

Like a home loan or a car loan, where the collateral is the asset purchased, a personal loan does not require any collateral. All you need is a regular income.

Easily approved and disbursed 

Once you submit all your documents, the loan is approved within 48-72 hours. If you are a pre-existing customer with a bank, a personal loan can be approved in less than 30 minutes. The loan disbursement will happen in another day or two. The time would vary from bank to bank and will also depend on factors like your credit score and eligibility.

However, even with all these benefits, there are certain features of personal loan which work against it. 

Very high interest rates

Since personal loans are unsecured, they come with very high interest rates. Their interest rates vary between 10.50 per cent and may go up to 23 per cent. 

The interest rate that applies to you will depend on several factors like your credit score, your loan repayment capacity, your debt to income ratio and so on. 

If you have an existing relationship with the bank, you can negotiate for a better interest rate. However, high interest rates mean you end up paying a lot as interest. 

Other associated charges 

Personal loans come with a processing fee. It is normally up to 2.5 per cent of the outstanding amount  or a fixed fee of Rs 750 or Rs 999 , whichever is higher. 

There may be a situation in which you have extra cash and want to foreclose a personal loan. However, there are certain conditions and charges to foreclose a personal loan. In most cases, you cannot foreclose a loan before you have finished paying 12 monthly installments. Also, personal loans charge a processing fee, which could be around 2- 4.5 percent of the outstanding amount. The pre-payment rates are generally is more for a shorter tenure and vice-versa. 

Hence, you should always analyse your cash flow very carefully before taking a personal loan. If you have other loan commitments, factor those in before deciding your EMI commitment. Shop around to get the lowest interest rates. And most importantly, do not go for a personal loan if you can avoid it.