Personal Loan: Advantages and Disadvantages
When you are thinking about taking out a loan, it is important to know what advantages and disadvantages this financial product will provide. So that when you choose the one that will be most beneficial, it will not lead to a bad financial situation.
There are times when we need money to buy goods or services such as a car, a computer, book a holiday or a leisure activity but don’t have enough money to pay it in cash. These are the expenses that ultimately have to be made at some point and having money is not always possible. That is why loan is the solution to your problem. Getting into debt sounds dangerous and not attractive to everyone or every situation, but loan makes immediate purchasing power possible.
Loan is the financial product offered typically by banks, NBFCs, fintech companies (called as lenders) using which the customer or borrower receives a certain amount of money. In exchange, the client will have the obligation to return this capital in addition to previously agreed interest, in periodic payments or installments.
To a loan is added the adjective “personal” when there are no mortgage guarantees.
(1) It offers easy access money to buy a product you want and/or need such as a car, when you didn’t have the money to do so.
(2) Loan can give you a large amount of money that can be used to cover heavy expenses e.g. education. Money invested in education will result in a boost in professional career. If you are interested in a specialized course, a master’s degree or want to learn a new skill, loan is the perfect solution.
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(3) You don’t usually compromise any particular asset and the process being faster than that of a mortgage loan.
(4) You can agree on the repayment term, to meet the financial objective but you have to keep in mind that, longer the loan tenure, the more interest you will pay.
(5) It is common for institutions to offer better deal such as an reduced interest rate when you decide to buy another product (e.g. insurance or credit card). But remember this is not an obligation, and should not be purchased just for the sake of interest rate benefit or others.
(1) There are some agreements that specify how you can use the money. These are restrictive and you have to be careful when applying for them. Borrower must bear in mind that this money is for something concrete and cannot be used for anything else. Going into debt and realizing that the money you have cannot be used for whatever you want can be an unpleasant surprise. That is why you should review the terms of the agreement very carefully.
(2) You will have to repay the money that has been lent plus the interest in a determined term.
(3) If you ask for more than you need, you may get into a bad financial situation of high debt. So it is advisable that when you buy this product, do not ask for more than the money you will need to meet the goal. For example, if you want to buy a car costing Rs. 10,00,000, do not ask for more than this amount, but the exact amount of the price of the vehicle.
(4) Interest rate is higher than that of the mortgage loan. As advised by many, compare different products to see which one best suits the current financial situation and not make a bad decision.
(6) Keep in mind that these loans will have other charges such as early closure, cancellation, processing fees, in addition to other fees that may appear in the contract, which increases the amount to be repaid.
At the end of the day, a loan is an investment and a long-term agreement that can give you opportunities, but you have to be careful. Thoroughly reviewing contracts and making sure everything is in order and within your means is fundamental.
Hope this information will help you make the right decision.
If you have any questions, we are happy to help you, please contact us through the comment at the bottom of this post.
This article has been written by Chandra Mehta.
Chandra is a seasoned banker with 35+ years of experience in banking and financial services industry. He’s a retired banker and has served as Chief Manager and Assistant Vice President in State Bank of India/or its subsidiaries.
He has authored many articles on this site (allonmoney.com).