Merits And Demerits Of Personal Loan

A Personal loan is a great solution to meet urgent financial requirements. However, like any other type of loan, a personal loan also has its advantages and disadvantages.

Personal loan Merits :-

Versatility :-
versatile in nature. That means that the borrower can use the loan amount for any legal purpose. For example, the borrower can use the loan amount for paying medical bills, home renovation costs, vacation expenses, etc.

Credit Score :-
Availing of a personal loan can help the borrower to improve their credit score. If the borrower makes timely repayments of the loan amount, it reflects positively on their credit score. Moreover, it can be beneficial for the borrower to avail of loans in the future as a good credit score indicates a good repayment capacity to the bank or the financial institution.

Debt Consolidation :-
An individual can streamline their finances and repay their loans and credit card bills with the help of a personal loan. This reduces the number of payments
made by the borrower every month and results in lower overall interest if the borrower’s credit score has improved since obtaining other loans.

Flexible Limit :-
Most banks and financial institutions provide a maximum limit of Rs. 25,00,000 on personal loans. This can be advantageous for the borrower during financial emergencies.

No collateral :-
A personal loan is an unsecured loan; therefore, the borrower does not have to pledge any security or collateral with the bank or the financial institution. In addition, the loan is issued against the borrower’s creditworthiness; the risk involved for the borrower is less as they would not lose their home or car if they fail to repay the loan on time.

Tenure :-
Banks and financial institutions provide a flexible and long tenure on personal loans to borrowers. Generally, a maximum term of 5 years is provided, though the tenure limit varies from lender to lender.

Repayment flexibility :-
Banks and financial institutions provide a flexible repayment structure. Borrowers can repay the loan amount through EMIs, i.e. equated monthly installments. This allows the borrower to not worry about paying off the loan by a lump sum amount, and the borrower can know beforehand the amount needed to be paid by them every month till the tenure end. Banks such as Oriental Bank Personal Loan offer flexible repayment terms.

Easily available :-
Personal loans are readily available. The eligibility criteria are minimum, and straightforward documentation is required. The loan processing time is quick, and the amount is disbursed by the bank or the financial institution instantly. The borrower can use the online or the offline facilities to avail of a personal loan. The easy availability of a personal loan has made it a standard solution amongst borrowers in urgent financial needs.

Personal loan demerits :-

High-interest rates :-
A personal loan accrues a high interest rate because it is an unsecured loan. Therefore, if the borrower defaults in repayment, it is difficult for the bank or the financial institution to recover the loan amount. Therefore, the bank or the financial institution’s risk is high, so a high-interest rate is charged on a personal loan compared to other secured loans.

Credit history :-
A personal loan is issued against the borrower’s credit history. Factors such as the borrower’s repayment history, existing debts, income stability, etc., are considered by the bank or the financial institution. If the borrower has a low credit score, the loan application can be rejected by the bank or the financial institution.

Additional charges :-
In a personal loan, various other expenses, such as processing fees, prepayment fees, origination charges, etc., are charged by the bank or the financial institution. These additional charges can make it expensive for the borrower to obtain a personal loan.

Debt trap :-
Taking a personal loan can lead the borrower into a debt trap if the borrower fails to make timely repayments. In addition, banks can charge additional charges if there are irregularities in rebates.

Also read this: Personal Loan Tips for New Candidates!