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Are Personal Loans Bad

By Kapil Dwivedi
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Personal loans are unsecured loans that can be used for a variety of purposes like home improvements, higher education, marriage, etc. When used wisely, personal loan offers certain benefits that can help in filling up a financial void that you may be experiencing. Personal loans are approved of and disbursed quickly with minimal documentation, this is what makes them quite popular.  

However, no financial product is foolproof and there may be a few cons associated with them. Before choosing a loan provider and  opting for a particular loan, it is important to take a closer look at different aspects of it, such as interest rate, repayment period, and maximum loan amount.

A common misconception is that these loans can bust up your credit score causing an overall poor credit rating. The truth is, any financial product when mismanaged can affect your credit score but when handled correctly it is an efficient mode of easy credit.

In this thread, we will discuss pros and cons of personal loans and certain situations where personal loan can actually turn out to be a bad choice. Before we go ahead and take a closer look at the pros and cons, let us understand what personal loans are and how do they work?

What is Personal Loan?

A personal loan is an unsecured form of loan that is provided by banks and financial institutions with minimal documentation. The borrowed amount is paid back in the form of monthly instalments over defined time period. The repayment tenor and interest rates vary from provider to provider. Typically, the repayment period is equivalent to two to seven years depending upon the provider.

People looking forward to getting personal loans can contact banks, credit agencies, and online lenders. In return for the principal, the borrower is expected to pay an interest rate that typically ranges from five to thirty-six percent depending upon the provider. Borrowers with a decent credit score are likely to qualify for a personal loan at a comparatively lower interest rate in comparison to those with poor credit scores.

If your credit score is poor you can increase the probability of qualifying for a personal loan by building credit and reducing your outstanding financial obligations. For people with poor credit scores, there are loan providers and private agencies that offer personal loans but at higher interest rates considering the overall credit rating and repayment history taken into account.

When is Personal Loan a Bad Idea?

There are a few situations when a personal loan can turn out to be a bad idea for the borrower, here’s a quick run-down

No credit check

One of the most common situations where a personal loan turns out to be a bad idea for the borrower as well as the lender is when there is no credit check carried out before approval and disbursement of the loan. When lenders do not carry out a credit check the repayment ability of the borrower is not assessed properly which means there is a higher degree of risk for the provider and higher rates of interest for the borrower.

Managing debts is Tricky for the Borrower

A personal loan for debt consolidation can help you to get rid of your outstanding financial obligations provided that you use the loan to clear your debts and stop making new ones. If you are unable to efficiently manage your debts and keep on opting for new ones it is advisable that you stay away from personal loans because it can ruin your credit score and financial stability.

You have Access to Better Alternatives

If you have easy access to better alternatives apart from personal loans it is advisable to opt for them. For instance people with decent credit scores there are numerous options such as zero-interest credit cards that can help them to manage their emergency requirement without opting for a personal loan.

Benefits of Taking Personal Loan

The key benefits of a personal loan are as follows-

Flexibility

When compared to any other forms of credit personal loans are quite flexible that makes them quite popular amongst debtors. Whether it is the repayment period, documentation, or disbursement time personal loans are incomparable in terms of flexibility.

Low-Interest Rates

When compared to credit cards the interest rate applicable on personal loan is quite low which is another reason behind its popularity in the mainstream market.

Unsecured Loans

Almost every form of loan available in the market requires collateral for processing, approval, and disbursement. However, when it comes to personal loans there is no requirement of collateral which adds to their popularity and flexibility.

In a Nutshell

A personal loan is a financial tool and its usage is dependent on the knowledge and skill set of the user. With the right knowledge you can make the best out of it but with incomplete knowledge, you can ruin your credit score and stability.