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The pros and cons of personal loans
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September 12, 2007

Personal loans are often referred to as all-purpose loans. They come in handy for purchases for which you may not have ready cash.

Many times, you may have thought of buying a consumer durables item with a consumer durables loan. However, it is advisable to go for a personal loan for consumer durables. The reason is, though personal loan clearance takes slightly longer, the rate of interest is often lower.

If such loans have their advantages they also have certain demerits that you should know before going in for a personal loan. Here is a detailed why and why not of personal loans:

The Pros

~ Unlike other types of loans, you don't need to produce any collateral, or security, to avail of a personal loan. You do not need to go to an agent to apply for a personal loan either. Several banks and companies will readily offer you this loan.  

~ If you dislike nosy financiers or inquisitive friends wanting to know what you plan to do with the loan, this could be the option for you. Once you satisfy the eligibility criteria, the loan is yours -- no questions asked!

~ Personal loans also include loans for educational purposes and holidays. Apart from these two categories, personal loans are usually taken to tide over an emergency shortage of cash, when the lender will not bother you with too many questions. Personal loans are available from Rs 15,000 to Rs 10 lakh, and usually need to be paid back over a maximum period of 60 months.

~ Opting for a personal loan may be a better choice than borrowing on your credit card if you want to keep your credit limit available for impulse purchases or an actual emergency requiring instant purchasing power. Often, borrowing money on your credit card carries a higher rate of interest than a personal loan (Although you should check your own situation since this is not always true).

The Cons

~ Of course, there is a downside. Though paperwork is minimal -- since the asset is not even defined clearly -- the qualifying criteria are    far stricter.

~ Therefore, the financier is perhaps doing a more thorough check on your capability to repay than s/he might even in the case of financing a home loan, for instance.

~ Since financiers perceive higher risk in this category, many follow a list of approved categories of borrowers.

~ Interest rates for personal loans are higher, ranging from 12 per cent to 30 per cent. All other rates including service charges and prepayment penalty are higher as well.
Quick tips

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

~ Though personal loan paperwork is less, compared to other loans, the qualifying criteria are usually stricter.

~ Most banks maintain an approved list of companies. If you happen to be an employee at one of these companies, you automatically make the grade for a personal loan. 

~ Personal loans have higher interest charges and rates than most other loans, except consumer durable loans. 

~ Very often, taking a personal loan is cheaper than borrowing on a credit card.

~ Read the fine print. Look out for closure charges, service charges and any other hidden charges.

~ Scrutinise offerings carefully and always compare schemes. Remember, what you see is not necessarily what you get. is a guide to education loans in India. Apnaloan also enables consumers get best education loan rates by making banks compete for their loan.

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