Personal loan as the name itself suggests are those loans which are given to individuals for personal use and they are given without any security, in case of home loans property is a security, in case of vehicle loan vehicle itself is security but in case of personal loan the individual himself or herself is security and the repayment of this type of loan is dependent only on the income of the individual. In short personal loan is an unsecured loan; let’s look at some of the advantages and disadvantages of personal loan –
Advantages of Personal Loan
- The biggest advantage of personal loan is that it can be used for variety of purpose, unlike housing loans which can be used for only construction or purchase of house or vehicle loan which can be used only for purchasing of vehicle. For example, if an individual needs $5000 for marriage, $2000 for the renovation of a house and $1000 for other important expenditures then a personal loan of $8000 will solve all his or her problems.
- Another advantage of personal loan is that the whole process right from applying for loan to the documentation of loan and then disbursement of loan takes far less time then compared to other loans. Hence when one is in urgent need of funds then a personal loan is the best option.
- All type of loans requires collateral security but personal loans are exception and hence people who do not have any fixed assets with them and are unable to get any loan then personal loan comes to rescue for such people. In short lack of any requirement of collateral security gives personal loan another edge over other types of debts.
Disadvantages of Personal Loan
- The biggest drawback of this type of loans is that they carry very high interest rate, since personal loan is unsecured in nature therefore lenders or banks charge higher rate of interest on these loans as compared to housing or vehicle loans.
- It is not easy to get this type of loan it is not like you will walk in the bank and bank will give you money, in order to get personal loan an individual needs to have good credit rating and good credit history hence this requirement regarding credit rating and history makes majority of individuals ineligible for personal loan.
- Another disadvantage of personal loan is that many banks and financial institutions do not allow part repayment of the loan which in turn results in debt getting bigger and bigger due to interest. So for example if you have taken $10000 personal loan and if you want to repay $1000 then bank will not allow such part repayment which is not the case with housing or other type of loans where the loan amount keeps getting reducing due to part repayment feature resulting in lower overall interest.
As one can see from the above that personal loans are ideal when there is short term cash requirement but borrower does not have any collateral and borrower requires funds immediately. However before taking personal loan an individual should keep in mind that personal loan carry very higher interest rates which can lead to problems if the loan is not repaid in time.