Reasons why you should not apply for a personal loan |
Posted: December 31, 2016 |
A personal loan is a good financial instrument that caters to all your immediate financial needs. Whether you want to buy an electronic appliance, or you need cash for renovation of your house, marriage, a medical surgery or any other expense; a personal loan is your best ally. It does not require any tedious document processing. After the verification of your income and repaying capacity the money is credited to your account in less than 24 hours. If the need for cash is indispensable and you do not have any assets to offer as collateral to get a secured loan then it is advisable to go for a personal loan. It is cheaper than using your credit card. Despite this apparent attractiveness personal loan has a number of disadvantages. So before you rush into applying for one it is important to understand the downside of this form of credit and situations in which you should avoid taking it. High rate of interest Since personal loans are unsecured banks are exposed to a greater amount of risk. They do not have any security in case the borrower defaults on the repayments. To offset this risk and safeguard their financial interest banks charge a high personal loan interest rates. This is in fact the biggest shortcoming of this form of credit. If you own any big asset like a property, gold or securities it is better to use them to avail a secured loan that charges a much lower rate of interest. Strict eligibility criteria When people say that it is easy to get a personal loan, it does not simply mean that anyone can walk into a bank and get cash without any hassles. It only means that personal loans require less paperwork. Getting a personal loan is no cakewalk for people with a bad credit history. The qualifying criteria for a personal loan is far stricter and only people with a very good credit rating become eligible. The bank does a very thorough background check to analyse the borrower’s capability and intention to repay the loan to ensure safety of their investment. So if you have failed to pay some of your previous loans on time you may fail to qualify the personal loans eligibility norms based on the credit worthiness. Varying interest rate based on credit score Banks have very definitive guidelines for personal loans. The interest rates and the loan amount are determined on the basis of the credit score of an individual. Most banks consider a score of 750 and above to qualify for a low interest personal loan. A person with a less than average credit score will not have any bargaining power. Even if he qualifies for the loan, the bank may limit the amount of loan that can be extended to him and also charge a very high interest rate. Hence if you are a first time borrower with no credit history or if you have an average credit score, this option of seeking credit will turn out to be quite expensive. No part payment feature Most banks do not allow part repayment of the personal loan. So unlike home loans, even if you have some spare cash and want to repay the loan, you cannot do so. You will continue paying high interest rates for the entire tenure of the loan. Even though personal loans are unsecured, the lender can still file a suit against the borrower in case of non-payment of instalments. In case you lose the case, you may even have to pay the attorney fees and other costs involved apart from the original loan amount borrowed, interest and late fees. Also remember any non-payment of loan instalment will leave a red mark on your credit report and tarnish your credit history. Since personal loan is a very expensive form of credit one should avoid using it to finance for luxuries or vacation. After the vacation life will become as usual but you will have an added burden of EMI. It is best to resist such expenses if you cannot afford it currently. Personal loans make sense only if one is in dire need of money and needs cash fast like in case of hospitalization. Opt for them only if you are sure of your ability to service the EMIs as per the repayment schedule. After all how your service your current debts will determine your ability to secure loans in the future. Once you have taken a personal loan make sure that you honour the commitments responsibly. Any delays or failure to pay an instalment will attract penalties, affect your credit score and may even land you in legal trouble.
|
||||||||||||||||||
|