New Delhi: These days getting a loan has become very simple, what with stiff competition among banks. Banks are more than willing to give a personal loan to the right applicant, but before jumping on to the bandwagon you should know the benefits and drawbacks of taking a personal loan.
Personal loans are easy to get and have their pros and cons.
Unlike other loans, you don’t need to produce any collateral, or security, to get a personal loan.
Personal loans are granted on the basis of an individual’s credit-worthiness. Banks do take into account the income, employment and other factors so as to ascertain the fact that the borrower will be able to repay the personal loan with interest in due time.
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Banks normally do not ask you for more than a few critical documents for approving a personal loan. A proof of identity, income proof, PAN card, Aadhaar card and residence proof will suffice in most cases.
Flexibility of use
Personal loans are multipurpose. They can be used for various different types of purposes, ranging from travel expenses, medical expenses, purchasing the latest mobile phone to jewellery.
Banks provide personal loans for 12 to 60 months. The borrowed amount along with the interest rate is calculated for the entire tenure of the loan and an equated monthly instalment (EMI) is calculated which the borrower has to pay every month.
Personal loans also come with a prepayment clause.
Paying off your credit card dues
Personal loans make sense when you have to pay off huge outstanding amounts on your credit cards. The interest rates charged by credit cards are very high, sometimes 45 per cent per annum. Taking a personal loan, therefore, to pay credit card dues is a viable option to reduce the amount of interest you pay.
However, you need to keep these things in mind before applying for one.
High interest rates
The interest rates for personal loans are very high and second only to the extremely high interest rates charged by credit card companies for credit card cash advances. Secondly, personal loan interest rates also vary from person to person. How much of a risk you are to the bank determines the terms and interest rates on your personal loan.
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Strict qualifying criteria
Qualifying for a personal loan is a strict affair because of the nominal paperwork and no security.
No part prepayments
Prepayment of personal loan can be done as a whole. Banks in India generally do not allow part prepayment of any personal loan.
The answer depends on your circumstances. Bankers say a personal loan may be easy to get but does not necessarily become the best solution.