There are many instances in life where we might need to borrow money from others. However, many people are sceptical of taking personal loans and assume that they make way for individuals to get trapped in debt traps. However, that is not the case. As a matter of fact, if you do not have any tangible assets and are in a pressing need for some cash, taking a personal loan is usually the best option. However, you must exercise caution and restraint while applying for a personal loan and using the loan amount. Here are a few reasons why you must be extra careful while taking personal loans:
1. Minimum Income Eligibility Criteria
There are certain eligibility criteria which must be met in case you want to acquire a personal loan. These requirements differ from one lender or bank to the other. Once you qualify for a personal loan as per the given guidelines, your personal loan would be instantly approved. While most banks have stringent eligibility conditions, lenders offering personal loans require borrowers to have a minimum income. Since personal loans do not require the submission of collateral, lenders usually undertake stringiest measures to ensure that only individuals who have the capacity to repay the loan are able to apply for one.
2. Need for a Good Credit History
Having a good credit history is mandatory when you plan on applying for a personal loan as otherwise your application would straightaway get rejected. No bank or creditor would want the liability of bad debt if in case you fail to repay the borrowed amount. So, prior to applying for a personal loan, ensure that you do not have any default in payments and have a good credit history. Defaulting on loans and EMIs negatively impacts your credit history and record, thus rendering you ineligible for future loans. Furthermore, individuals with a healthy credit history are usually offered higher loan amounts and lower interest rates as well. Thus, if you have a poor credit history, personal loans are not for you.
3. High-Interest Rates
While most interest rates for personal loans remain fixed during the tenure, the fact is that these are considerably higher than that of secured loans like home loans, car loans, or education loans. This is because personal loans are offered without any collateral or securities, which increased the risk quotient for the lender. In order to compensate for the same, they raise the interest rate to ensure that they get better returns for taking higher risk and that the principal loan amount is repaid quickly.
4. Part Payments Are Usually Not Allowed
If you have ever taken a secured loan, you may have seen that you can pay off the debts in the form of part payments. However, in the case of a personal loan, this option is not offered by many lenders. This means that, even if you have some extra cash on you in a particular month, you cannot clear a part of your debt to reduce the next payable EMI. You would have to pay off the debt as decided initially for the entire loan period. Most personal loan lenders benefit from long repayment tenures and the higher interest rates they charge; thus, they do not encourage part-payment of the debt.
5. Additional Origination Fees
In addition to charging the higher rate of interest, lenders offering personal loans usually charge lesser-known fees as well. One example is the origination fee, which can vary between 1-5% of the total loan amount borrowed. These fees and charges include the processing fee and verification fee and depend on credit history as well. The processing fee is usually lower for other secured loans like home loans and car loans, offered by banks.
While opting for a personal loan, you keep in mind the above-mentioned points. Remember, the ease of availability of personal loans is offset by the higher interest rate and fees charged by the lender. However, if you have no option but to avail an instant loan, make sure that you borrow only the amount which you genuinely need, even if you are eligible for a higher sum. Thus, choose the loan amount wisely, select the best EMI plan, and pay your EMIs on time to make sure that the loan doesn’t hamper your long-term financial health.