Advantages and disadvantages of Personal Loans

Advantages and disadvantages of Personal Loans

Personal loan or Secured Loans refers to an in secured type of loan that a consumer borrows to carter for his or her wants, such as buying home appliances, a vehicle, and renovation purposes or for marriage expenses. A personal loan is given after a consumer’s ability to pay is verified, precisely the source of income, including credit history. Some amount is charged to cater to the processing fee, and the borrowed funds are credited to one’s account according to the person’s ability to pay. Making a payment of personal loans is done through fixed installment inclusive of the interest charged over a fixed time. Currently, loans come in handy; individuals get loans easily, either from banks and other lending institutions. Financial institutions solve the problem of tedious paperwork and the bulk of formalities faced by the borrowers. Also, money lending institutions provide the easiest and convenient way of borrowing loans.

Benefits of personal loans

  • Easily available – acquiring a personal loan is just an easy task. Banks and other financial institutions give loans at a quite realistic interest rate. It is convenient and easy to get personal loans compared to other types of loans.
  • No involvement of middleman or agent – acquiring a personal loan does not need an agent or middleman. This helps in avoiding unnecessary expenses and delays. An individual can approach the bank or the particular financial institution directly.
  • It is an unsecured type of loan – since the personal loan is unsecured, collateral security is not required to acquire the loan. The only critical requirement is one’s ability to pay the borrowed money, which depends on the source of income. A consumer does not have to provide a guarantee or mortgage his or her assets. Once the bank or the money lending institution is assured about one’s repayment ability, the processing of the loan is immediately done.
  • Short loan processing time – since personal loans involve no security or guarantee, the loan processing time required is also concise.
  • All-purpose loan – while acquiring a personal loan, specifying the purpose or the reason for borrowing the money is not mandatory. One can use the funds credited to his or her account for any purpose. It is the decision of the consumer to decide on what to do with the amount given.
  • Less paperwork - borrowing a personal loan does not require any verifications of assets or other types of certificates and proofs that involve much paperwork since none of your assets is mortgaged.
  • Schemes and special offers – various money lending institutions and banks severally announce special offers and schemes of individual loans for professionals such as doctors, architects, and Chartered Accountants.
  • Amount and tenure – the amount of personal loans given to borrowers, ranging from Rs 15k to Rs 20k, but this varies from bank to bank. EMIs are a convenient option for repayment of the loan. A loan tenure depends on the amount given and maybe a period of twelve months to sixty months. It is always advisable to go for a personal loan rather than borrowing money from credit cards since the personal loan’s interest rate is moderately low.

Disadvantages of personal loans

  • Credit history – to qualify for a loan, one must have a good credit history failure to that the application is rejected. No lender would wish for bad debt for the money given out. So before applying for the loan, one should have a good credit history that contains no default in payments. It is always advisable to borrow a loan from a bank where one has an account or where one shares a good rapport. Personal loan applications with a new financial institution or bank may be tedious since they may ask for detailed documentation, references, and verification.
  • Qualification criteria – an individual must qualify as per the stated guidelines of the bank, and once one does that, the loan processing is guaranteed. Qualifications may vary among different banks, and other money lending institutions observe harsh strategies for this case since there is no collateral security.
  • A bank account is mandatory – while applying for a personal loan, a bank account is compulsory, although not necessarily from the bank that an individual is borrowing money from.
  • Lenders risk – since the personal loan is an unsecured type of loan, the lender’s risk is quite high because there is no guarantee or collateral security. If the borrower is not able to make repayments, then the recovery of the money is tedious and very expensive.
  • No part payment – lenders don’t accept part repayment of the amount borrowed. This simply means that a borrower ends up paying the loan before the entire tenure of the loan. It can be quite expensive because the borrower’s initial installments go as per the interest rates.

Long term loans

Long term loans can be said to be a positive exercise between a business and a consumer. Since the flexibility of the financier’s limited investment is relatively increased, the positive credit developed makes it potentially cheaper and easier to apply for a loan in the future. It is barely possible for an individual to have enough cash at hand as the investment to a business or personal expenses; therefore, long term loans provide with necessary funds to cater for these expenses and investments. Long term loans can range from a period of 3 to 25 years.

Advantages of long term loans
  • Cash flow – since capital is a limited resource, investing huge amounts into any project or asset limits the capital meant for other investments. Long term loans save time that is intended for investments, and investors can realize potential profits earlier to aid the offset cost. Although keeping some amounts of money at hand is vital to cater for unexpected expenses, saving enormous amounts is inefficient. Long term loans help to increase the flexibility of an individual’s capital by minimizing the immediate effect on operational cash flow.
  • Build credit – in general, long term loans have a well-structured repayment process that has been designed to meet the repayment ability of the borrower, notwithstanding unexpected events. Therefore, making regular repayments of the borrowed money helps a business or an individual to build creditworthiness with the lender.
  • Minimizes investor interferences – share issuing and seeking of private investors are the common ways to raise capital for investments. However, they divide ownership of the business and redistributes management and control. Long terms loans give a chance to finance potential investors as well as controlling the firm.
Disadvantages of long term loans
  • The major demerit of a long term loan is that it restricts an individual’s monthly cash flow in the next term.
  • The loan interest is a great burden to the company. The investors must pay the fixed amount of interest, not considering whether they have made a profit or not.
  • Long term debt has a fixed maturity date. Therefore, the lender must make the provision for payment of the loan.

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