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Personal loans offer a lot of flexibility and versatility as they enable you to pay for your financial needs. They help you fill a void in your budget without risking your assets, such as a home or a car.
Like any other loan, personal loans also affect credit reports and are not the right choice for everyone. In this post, we will take you through a few pros and cons of personal loans to help you understand whether you should opt for one or not. Let us begin with understanding what a personal loan is and how it works.
A personal loan is a type of borrowing that gives borrowers a fixed amount of money for a fixed amount of time. These loans are primarily unsecured and do not need collateral to reduce the risk factor and secure funds for the lenders.
Personal loan repayment terms usually range between one to ten years, depending upon the borrowers’ financial condition. To apply for a personal loan, you need to provide your basic information such as your name, address, contact details, monthly income, existing loans and more.
Lenders in the UAE check your credit score before approving your personal loan application. Once your application gets approved, you get the personal loan amount credited to your bank account. The instalment amount for your personal loan remains the same for every month. It includes a portion of your principal amount with the applicable monthly interest.
There are both advantages and disadvantages of a personal loan. People can choose to take a personal loan to fulfil different types of financial needs. Let us go ahead and know more about the pros and cons of a personal loan.
Personal loans offer numerous benefits over other types of loans and mortgages. Here are a few key benefits for the borrowers taking a personal loan.
Paying your personal loan EMI on time helps you build a good credit score. Your credit score is a critical part of your credit report. Every lender in the UAE checks your credit report before providing you with a loan. A good credit score shows that you are financially responsible and helps you get your loans approved without any hassle.
A personal loan comes with flexible usage benefits and can be used to pay for any type of expenses, bills and other liabilities. Unlike other types of bank loans, personal loans help borrowers pay for their debts and other loans. For example, if you take a home loan, you can use it only to build a home and not to meet other day-to-day expenses. On the other hand, when it comes to using a personal loan amount, you can use it to meet any kind of expenses, including paying your home or car loan EMIs.
Personal loans make it easy to consolidate all your debts and make a single EMI for the entire borrowed amount. This reduces the number of payments you need to make every month and saves you from missing out on any of your EMIs. Another benefit of taking a personal loan to pay off your debts is that you get lower interest rates and do not end up paying higher instalments for taking out the loans.
Personal loans let you borrow a higher amount of money at lower interest rates. If you have maintained a good credit score, the banks and other financial institutions will offer you lower interest rates on personal loans. Sometimes, a good credit report enables you to get a higher loan amount in comparison to the limit of all your credit cards.
Personal loans are unsecured loans. The best part about taking a personal loan is that no collateral or security is required for the loan approval. You need not put any of your assets as a guarantee to ensure that you will pay off the loan in time. If you do not repay the loan on time, you may face some financial challenges, but you need not worry about losing your home or any other asset.
Personal loans come with fixed interest rates and EMI amounts, which is why they are easy to manage. You can take a personal loan to pay off all your credit card bills or any secured loan EMIs. If you have got lower interest rates on a personal loan than your credit card, you can make easy monthly bill payments and save money in the process.
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With all the benefits mentioned above, personal loans also have some drawbacks. Let us go ahead and check out the same.
Borrowers with a good credit score can get lower interest rates on personal loans. On the other hand, if they have a bad credit score, they may end up paying higher interest rates. Depending upon the credit score, these interest rates may be even higher than other types of loans such as a home loan, student loan, car loan, etc. Make sure you consider all the alternatives before applying for such a personal loan with higher interest rates.
A good credit score enables borrowers to get an unsecured personal loan. However, a bad credit score shows that the borrower is not financially stable and responsible and they need to apply for a secured personal loan. A secured personal loan needs collateral against the amount the lender provides. A borrower can submit assets like a car, house, boat or any other belonging as collateral to get a sufficient amount of personal loan.
Lenders create a credit report for every borrower. As they send the credit bureau the positive payment history, in the same way, they also share the late payment or non-payment reports. As a result, borrowers not making their payments at all or on time end up getting a lower credit score. So a personal loan, if not paid back on time, can lead to credit score damage.
Depending upon the reason for borrowing funds, sometimes personal loans can lead to unnecessary debts. Before you apply for a personal loan, make sure you analyse all your financial needs, explore all the available options to pay for them and evaluate the urgency to make a sound financial decision.
Most lenders in the UAE charge some additional fees and charges while processing a personal loan application. Additionally, borrowers need to pay penalties if they fail to pay their loan EMIs on time. Make sure you check all the fees and penalties applicable before applying for a personal loan.
Taking a personal loan is the best option if you have a good credit score. It helps you qualify for a lower interest rate. This way, you can meet your urgent financial requirements and that too without increasing your debts.
With a personal loan amount, you can consolidate your credit card bills and clear the outstanding balance while paying lower interest rates in comparison to the ones your credit card provider will charge for making delayed payments.
Taking a personal loan is a good idea as it enables borrowers to consolidate all their debts, including home loans, car loans and more, by making a single payment for all the borrowings.
With all these pointers, make sure you also consider the personal loan repayment schedule and timeline. You can use online personal loan calculators to evaluate your EMI amount and find out if you will be able to afford them or not. In some cases, it is advisable to increase your savings to pay for your debts instead of paying higher interest on a personal loan every month.
Before you apply for a personal loan, you must create a plan stating how will you repay the same. Keep in mind all the pros and cons of personal loans before making any financial decision. Make sure you explore all your options and opt for the most suitable one based on your financial preferences.
You can also visit our website and go to the personal loan section to find various alternatives. In case you need assistance, you can call our help and support team, and our financial experts will let you know about all your financial options in detail and help you in choosing the one that caters to your needs.