Whenever you need extra cash to finance a wedding or pay for home improvement, you should consider a personal loan. It is a low-interest loan that can help meet several goals and if you use it wisely, it can help fill the void in your budget without having to provide collateral. The interest rate on a personal loan will depend on your credit score and this might put you at a disadvantage if you do not have a high score. However, the loan is also offered to those with a poor credit score. But before you take a leap, take a look at the pros and cons of a personal loan from finance company.
Pros of a personal loan
There are some loan products that can only be used for a certain purpose. Let us take an example. If you apply for a car loan, you can only use the funds to buy a car. Similarly, if you apply for a working capital loan for the business, the only way you can use it is to meet the working capital needs. But personal loans can be used for various purposes right from paying the medical bills to debt consolidation to home renovation expenses. If there is a large payment you need to make and do not want to be locked in how to use the money, you can apply for a personal loan.
A personal loan from a finance company will come at a lower interest rate than using a credit card for payment. The average rate of interest in the case of a personal loan is lower than that of any other loan product. If you have a strong credit score, you can qualify for a low-interest rate on the loan. It will reduce the overall cost of borrowing and will make it convenient and easier for you to repay the loan in time.
No collateral needed
A personal loan does not require any collateral for you to be approved. Hence, you can apply for a loan even if you do not own any assets. There is no need to set an asset up as a guarantee that you will repay the funds in time. However, if you fail to make the loan repayment on time, you will face financial consequences but you will not have to worry about losing an asset.
Easy and convenient
One reason why people take a personal loan is to use it for immediate large payments. The loan comes with a fixed rate of interest and has a single monthly payment. It is much easier and convenient than handling credit cards with varying interest rates. The eligibility criteria are simple and straightforward with a hassle-free application procedure.
Cons of personal loans
Strict income criteria
Personal loans have minimum eligibility criteria but they do come with a strict income requirement. If you want to apply for a loan, your minimum monthly income should be Rs. 15,000 and you need to attach proof of the same. If you do not have the minimum income, you will not be eligible to apply for the loan.
Fees can be high
All loans come with fees and penalties which can lead to a high cost of borrowing. The loan may have a low-interest rate but the processing fees and penalties could be high. This amount could be deducted from the total amount disbursed. Hence, it helps to compare the fees before choosing a lender. Some lenders can also charge prepayment penalties when the loan is paid before the end of the term and it can drive up the total costs.
Restrictions on end-use
While a personal loan can be used to meet several goals, it also comes with certain restrictions. You cannot use the loan for business purposes. It helps to be aware of the restrictions associated with the loan before you make the loan application.
The pros certainly outweigh the cons but you need to be aware of the same before making a loan application. A personal loan from a finance company is an attractive option when you need quick funds and several lenders in the country make funds available within a few days. The loan comes with low-interest rates if you have a good credit score and you can use the money to pay for immediate, short-term needs.
However, the loan might not work for everyone. It is a form of debt and you will have to pay the EMI each month. You need to keep this in mind and then agree on the EMI amount. Use the EMI calculator before you make a final decision. It helps to keep your monthly inflows in mind and then agree on the loan terms and conditions. A personal loan can help you in several ways if you plan well.