As life becomes complex, there are financial needs that one cannot anticipate in totality.
Be it a medical emergency or some unexpected expenses at a wedding, one needs a lifeline in terms of quick access to money. Personal loans do just that. It is a loan where the borrower need not disclose the end use of the money borrowed.
There is no restriction or compliance with specific conditions of usage for the borrower.
It is a loan which can be used to raise money at a comparatively short notice for any purpose, making it a rather convenient option for the borrower. These are relatively small-tenure loans, typically for less than five years.
Personal loans also come with a whole host of charges. The borrower has to pay the processing fee while applying for the personal loan in the range of 1-2% of the entire loan amount. Then, there are late payment charges (1-2%) and pre-payment penalties (2-5%) along with any other charges applicable from bank to bank.
This makes the personal loan a costly bet for the borrower.
Since these loans are unsecured in nature, there is no need to offer any asset as collateral. The borrower's identity and address proof along with documents establishing repayment ability (salary slips, income-tax returns) are enough to apply for a personal loan.
These are primarily unsecured loans where the borrower need not offer any collateral while borrowing, thus making it a risky bet for the lender.
The lender, in turn, seeks to compensate for the higher risk he takes by charging higher interest rates on such loans. In most cases, a personal loan is the costliest access to money after credit cards in India.
The rate of interest payable on personal loans is in the range of 14-23% and arrived at by taking into account the loan amount, tenure and borrower's credit profile.
This is the reason why one should stay away from personal loans.
Personal loans come in handy only for those who have already exhausted their borrowing limits under the comparatively low cost asset-backed options such as home loans, home renovation loans, loan against property and car loans.
Borrowers trapped in high cost debts such as credit card outstanding, can also consider personal loans to refinance their liabilities.
