Whether you want to clear credit card debt, pay for emergency car repair or consolidate all your debts and pay them at once, a personal loan is a much better source of cash, compared to, say credit cards. However, if you have other assets such as permanent life insurance cover, stocks, gold or property, take a loan on such assets as their interest rates are lower than those charged on personal loans.
Analysis of Personal Loans
There are two broad categories of personal loans; secured personal loans and unsecured personal loans. A secured personal loan is the one in which you are required to present some form of a collateral for the loan, usually an asset such as your land, house or car.
As the name itself implies, unsecured personal loans aren’t backed by any collateral, just like credit cards. While you aren’t required to provide any form of collateral as a security for this type of loan; in the event of a default, the bank can file a suit against you in order to collect its due share. As a precautionary measure against this scenario, most banks assess your credit history and credit score in order to determine the interest rate that you will pay.
Personal loans are easy to obtain due to minimal paperwork, with most lenders typically processing them and sending you funds within 24 hours or a few days. However, such loans aren’t without their shortcomings.
Pros of Personal Loans
They are flexible: This means that you can use them for any purpose such as funding your holiday trip, medical costs, car or home improvement, or even buying the latest electronic gadgets.
Fast processing times: Personal loans are processed very fast, ensuring you get your funds within 24 hours or a few days. Hence, if you have an emergency and is short of savings, you should consider applying for personal loans.
Less paperwork is involved: Personal loans require fewer documentations when compared to a car loan or home loan, meaning that they are processed very fast.
No security or collateral is necessary: This applies to unsecured personal loans, though the loan duration is usually short due to the risk of default. The primary benefit of unsecured loans is that your assets won’t be seized in case you default on the loan.
Cons of Personal Loans
Credit score is required: Given the high-risk nature of personal loans, bankers usually require that borrowers must have good credit ratings. This means that if you have a poor credit rating due to defaulting on a loan repayment in the past, your application won’t sail through.
High interest rates: Since personal loan applicants aren’t required to provide any form of collateral, they tend to be viewed as highly risky by banks. Hence, such loans have higher interest rates to cater for the risk premium.
No part payments are allowed: Most banks will prohibit you from making part payments on the personal loans. Hence, you are required to repay the loan during its entire tenure. If the repayment period is lengthy, the loan will turn out to be expensive as most of your loan instalments will cover the cost of interest rates.
