The pros and cons of personal loans

By | July 19, 2012

Should you go for a personal loan? The answer depends on your circumstances. If you have a pressing need for cash, and don’t have any assets, but own a credit card, a personal loan is certainly advisable. This is because cash withdrawal using your card is far more expensive than a personal loan. But if you have assets like property, gold or shares, it is advisable to take a loan against these assets since these loans have lower interest rates.

Need money in a hurry without having to go through tedious documentation processing? Want cash to fulfill your need without having to explain the reason for obtaining the loan? Then personal loans are your best ally. You can get them easily in a period as short as 24 hours. All that is needed is to fill out an application form with the lender and the cheque would be delivered to your doorstep within a few days. In some case, the amount may also be credited to your bank account (if you hold savings accelount with the lender).  However before you rush out to get a personal loan, it is important for you to understand the pros and cons of personal loan, in order to make an informed decision.

Pros: Personal loans do offer you many benefits. Here are some of the most important ones.

  • 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 jewellery to electronic gizmos or even house/car improvements.
  • Quick availability: Getting the personal loans is very fast. In some cases, you can get the loan even within 24 hours. So if you are looking for emergency funds, personal loans are your best bet.
  • Minimal documentation required: Normally, personal loans don’t need much documentation, as compared to a home loan or car loan. Hence the processing time is quicker.
  • No collateral or security needed: No need for security is required to obtain this loan and the loan tenure is much shorter compared to home loan or car loan. This has less risk for the borrower comparatively, since if you are unable to repay the loan, your security is forfeited in case of other loans. As personal loans don’t need any security, your assets are safe. This makes this kind of loan attractive to those who don’t own any assets like car, home, shares etc.

Cons: Despite their apparent attractiveness, personal loans do have their fair share of disadvantages. Prominent amongst them are:

  • High interest rates: As these loans don’t need any security, they are regarded as high risk by the lenders. In order to offset their risks, these loans carry very high interest charges.
  • No part payments: Most lenders don’t allow part payment of loans. This means you end up paying the loan for the entire tenure of the loan. It can work out quite expensive, since your initial installments go towards interest payments.
  • Need for good credit rating: As these loans are quite risky, most lenders insist on their borrowers having a good credit rating. So if your credit rating is poor, due to failure to pay any loan, your application will be rejected. Hence this loan  availability is subject to strict eligibility norms based on credit worthiness.
  • Variable loan and interest as per your credit rating: Even those lenders, who offer loans to the borrowers with poor rating, end up offering lower principal amount and higher interest as compared to those given to borrowers with good rating. They also impose stricter repayment terms on these borrowers.

Should you go for it?

The answer depends on your circumstances. If you have a pressing need for cash, and don’t have any assets, but own a credit card, a personal loan is certainly advisable. This is because cash withdrawal using your card is far more expensive than a personal loan. But if you have assets like property, gold or shares, it is advisable to take a loan against these assets, since these loans have lower interest rates. Also take into account your income, your other liabilities like home loan, other bills, and miscellaneous expenses. Also ensure you are able to honour your commitment, since failure to repay the loan will not only affect your credit rating but will also land you in legal trouble. Lastly, decide if you can do away with the loan. While this loan may be useful in certain instances like medical emergencies, it doesn’t make sense if you are using it to fund your vacations. Hence it very important for you to weigh the pros and cons before apply for a personal loan.


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7 thoughts on “The pros and cons of personal loans

  1. Udayabhanu

    Please don't opt for personal loan as this wil eat away all your money if not utilised for the higher returns.

    Best is to avoid it. It's better to suffer less now than to suffer latter more

  2. Mohit Saxena

    taking any loan is not advisable for meetimg expendityres which can be easily avoided . In case of emergencies only, Personal loan should be taken as last resort. In case you are prompt in making instalments, then there may be no problem

  3. Anonymous

    Best to avoid personal loans particularly from MNC Banks and PVt Finance
    Co's as their collection machinery is extreme.They will call you on Sundays
    for payments unlike PSU Bnaks.

  4. Prashanth

    I have taken Personal Loan from ICICI Bunk , i have requested them to close or take part payment to close my Loan. even i hav asked them its okay even if they charge high…. i required to close this loan but they resist closing early loans….

    They avoid any quires on this ….. iam now more reluctant to take any more Personal loans … instead take from some local banks where they r freindly.

    If u by mistake dont pay any emi , recovery team will arrive at doorstep…

  5. Tuwaram Dutta

    For self employed people personal loan is not easy compare to salaried one.

  6. Sachi Mohanty

    Personal loans are a great tool to take care of a myriad of cash necessities.

    I availed of a personal loan for a pretty curious reason: to make 80CC investments.

    The other time I took a PL, I invested it in a bike.

    The good thing about a personal loan is that once you've a loan burden on you, you know that a certain amount of your monthly salary will go towards repayment of the loan and you tend to make your calculations accordingly.

    Otherwise, if you had that cash amount in your account, you might have just wasted it in miscellaneous activities or expenditures.

    So, as long as you put your borrowed money to good use, there's no harm in a personal loan.

    Of course, in today's job environment, when you're suddenly out of a job, then it might become a bit of a challenge to repay your loan if you happen to become unemployed for a prolonged period of time …

    I have experienced that as well … luckily, I remained unemployed for only two months.

    When you become unemployed, the salary stops coming, but the repayment obligations don't!!!

    So, that is something to keep in mind — how sure you're that your company isn't planning to 'downsize' you or that it's not going to go under in the near future …


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