Do Personal Loans Come at a High Cost?

The banks today offer a vast variety of loan options. Maybe you want to buy that new gadget or you are hoping to go on a holiday. If all you need is a little more money, banks are the answer. Depending on your need and situation, you can opt for one of the loan options they provide. You can get a loan against property, against gold, a personal loan, etc.
The advantage of a personal loan is that it doesn’t require collateral. Therefore, the debtor doesn’t stand to lose a valuable possession in case of an inability to repay the loan. Hence, people without assets, or those unwilling to put them on the line, find this a suitable option.

A personal loan is also easy to avail with the option of e-approval. The process for a personal loan is quick and it has a very small processing fee. But although a personal loan seems like the perfect loan, it too has some drawbacks.

Due to the high risk involved, a bank is extremely careful about who they lend money to. Depending on your profession, the loan allowance can change as well. A dentist is likely to receive a higher loan allowance than a carpenter. A good credit history, in such a case, is likely to turn the tables in your favor. The high risk will push the bank to seek clients who are more likely to repay the loan. This is also why the interest rates are much higher for a personal loan than for many of the other kinds of loans.

If you do, by chance, get a loan on a bad credit history, your interest rate is likely to be much higher. The average rate of interest for personal loans in India is 12-15%. This is much higher than other loans. Loans against property will have an interest rate between 4-6% in many cases. The difference, here, is due to the presence of collateral in the latter. If the debtor, due to any circumstance, is unable to repay the loan, the bank can sell his collateral to regain their loss.

But the high interest rates of the personal loans can often prove a difficult task for the debtor to repay. If managed properly, they will aid you in your time of distress. But if not handled right, they have the potential to plunge you into debt. The disadvantages of personal loans often seem to outweigh its advantages. Hence many people advise that it should only be used as the last resort.