The Pros and Cons of Personal Loans - Personal Loan Blog by Tata Capital

The Advantages and Disadvantages of Personal Loans

Mar 01, 2017

Consumer loans are a great way to get out of a financial debt. You may avail of personal finance from a bank or a lending institution to fund your emergency financial needs. However, it is important to understand the advantages and disadvantages of such loans.

Pros of personal loans

There are numerous benefits associated with consumer loans. The three important ones are as follows.

  1. Flexibility of use
    One of the best features of a consumer loan is its flexibility of use. A borrower may use the received capital for any purpose he wishes to. Such finance may be used for numerous needs, like jewelry purchase, wedding expenses, and home improvement.
  2. Lack of collateral
    Personal loans are also known as unsecured loans; this indicates that no collateral is required against the loan. If the borrower defaults on his payment, the lender forfeits the asset. This type of loan is best suited for those individuals who do not own assets like land, home, or property that may be kept as collateral.
  3. Quick application
    You may opt for a personal loan online for quick approval and disbursement. Most lenders have an online presence to provide the benefit of convenience to their customers. Additionally, consumer loans don't require much documentation as compared to other types of loans. Besides, such loans are processed quickly. Hence, consumer loans are the most-preferred source for emergency funds.

Despite having numerous advantages, unsecured loans have their fair share of cons. Three prominent disadvantages are as follows

  1. High credit score requirement
    As such loans are unsecured loans; lenders require applicants to have a high credit score to offset their risk of non-payment. Hence, your chances of getting a loan approved are high if you have a good credit score. Similarly, if you have poor credit history, your loan application may get rejected. Loan availability is subject to basic eligibility criteria based on the applicant's creditworthiness.
  2. High interest rates
    Quite often, lenders charge higher interest rates on personal finance. This is due to the fact that no collateral is kept as a security against the loan. Hence, lenders face a higher risk. To offset this risk, lenders levy a higher interest rate. However, you may avail of attractive interest rates if you have a good credit score, an excellent relationship with the bank, and a stable job.
  3. Loan amount may be smaller
    Banks and lending institutions go to great lengths so as to reduce the risk of default. For this purpose, they may limit the amount they lend to you. If you do not have job stability and if your credit score is low, the chances of obtaining a huge amount are very low. Lenders conduct extensive checks on employment history and credit score to gauge your repayment ability.

It is imperative to identify what you have to gain from a consumer loan and what you stand to lose. If you are in dire need of finance, try to overcome the disadvantages and make it work in your favor. Read the terms and conditions of the agreement very carefully before signing on the dotted line. Only once you have detailed information about the pros and cons of personal loan will you be able to make a financially sound borrowing decision.