There is a certain charm associated with personal loans. They always seem to be the best option when you want to buy a high cost product, invest in a new business, or even want to take a mini vacation outside India. The fact that you don’t have to provide collateral also makes personal loans so attractive. However, are personal loans really the most convenient and stress-free way to get money? Maybe, or maybe not. While personal loans do have their advantages, they also have their fair share of risks you must know about.
High Interest Rates
Personal loans interest rates are generally quite high because they are unsecured loans. Since you don’t need to provide collateral for a personal loan it is risky for the lender to sanction it. If for some reason you are unable to repay the loan in the future and are added to the loan defaulter list, then it can become difficult for the lender to get their money back. In case of a home loan or a car loan the bank can secure the loan against the property or the automobile. Thus, they can afford to offer low interest rates due to low risks.
High Penalties and Fees
Personal loans are also often considered as short-term loans, and they have higher fees and fines in comparison to other long-term loans, such as Home Loan, education loan for MBA etc.
Any default on the repayment of EMI attracts higher penalties and late fee on short term unsecured loans in comparison to the secured loan with longer duration of repayment. Since personal loans are short term they make up for the short tenure with high penalties.
Incidents of people who take personal loans impulsively and end up with huge debt are a dime a dozen. This has mainly to do with the ease at which you can get a personal loan. Let’s take an example. Your friends and you decided to take a luxurious vacation at Singapore. However, since you didn’t have enough money you decided to take a personal loan. During your vacation you also used your credit card liberally and bought many expensive souvenirs, clothes, and other extravagant items. After a week of fun and entertainment you are back at your home and get your credit card bill. You realize you have spent way more than what you can handle, and there is a high personal loan EMI to be paid too.
Credit Score Damage
Not using a personal loan responsibly can have serious repercussions on your credit report and credit score.
Let’s say you want to buy a new house. However, since you usually get only 70% to 80% of loan amount from a lender you decide to pay the remaining amount with a personal loan. Now, not only this will put the financial strain of two types of loans with different interest rates on your shoulders, but your credit card can also receive a blow for the same.
Since you have applied for two loans around the same time in the example above, this will make the lenders believe that you are short on cash and in a desperate attempt to fund your purchase you are looking for loans. They will inform this activity to their credit bureau, as a result of which your credit score will drop.
There is no reason to believe that personal loans are a bad idea. In fact, they are often the best option when you need somewhat large amount of money for a short period. However, they must be applied for with caution. Make sure your CIBIL score is above average before you apply, and compare all the options thoroughly to pick the most suitable loan. Also check if the lender is offering zero processing fee and whether the interest rate is floating or fixed. By doing your homework in advance you can easily find an affordable personal loan that will satisfy your credit needs.
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