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Should you take a personal loan at all?

The advantages and disadvantages of taking a personal loan

Greha Mataliya

10 Aug 2007

Personal loans are probably the fastest and most easily available of retail loan products. They are, however, costlier than other loans, such as home loans, loans against property, or loans against shares.

The Pros

  • Unlike other retail loan products such as home loans or loans against property, you don't need to produce any collateral or security to avail a personal loan. The paper work is also minimal compared to other loans; making the loan processing quicker.

  • You also do not have to specify the end use of the money while taking a personal loan. All the lender is interested in is whether you are capable of paying the EMIs every month on or before the due date.

  • Getting a personal loan is cheaper than borrowing on your credit card. So, if you have run up a huge outstanding amount on your credit card and the accumulated interest is making it almost impossible to clear your outstanding, a personal loan might be the way to go. What you do here is use money borrowed at a lower interest rate (the personal loan) to pay off money borrowed at a higher rate (outstanding amount on the credit card).

The Cons

  • Since banks perceive higher risk in this category, many follow a list of approved categories of borrowers. If your profile doesn't match up to any of these pre-approved categories, your loan application will be rejected.

  • The interest rate of personal loan can be high; sometimes double that of home loans, especially if your credit profile is weak.


Quick tips
Before you consider taking a personal loan, take a look at these tips:

  • Interest rates on personal loans vary wildly from bank to bank and are based primarily on the customer profile. For instance, an employee of a multinational company may get a personal loan at 12%, while a self-employed person gets it at 24%. You should ensure that you get the best deal for your profile.

  • Read the fine print. Look out for foreclosure charges, service charges, and any other hidden charges. Prepayment fee or foreclosure charges on a personal loan can be as high as 5%.

  • Scrutinise offerings carefully and always compare rates offered by other banks.