What is a Personal Loan and how it works?
Some kinds of loans are designated for specific purchases. For example, you can buy a home with a housing loan, a car with a car loan, pay for higher education with a student loan, and have a faraway trip with a vacation loan. In case of a mortgage, you give your house as a security to the bank, and likewise, for a car loan, the car you’re purchasing will be the security. There is the lowest personal loan interest rate as compared to other loans.
In case you fail to repay the loan amount to the bank, they have complete authority to seize the property secured or given collateral; however, a personal loan is given without any security or collateral. It is unsecured in nature. The bank is obviously taking a higher risk and thus charges you a higher rate of interest than they would with a home loan or car loan. You can use the facility of a personal loan EMI calculator online to calculate how much you will have to pay monthly to clear off the debt promptly.
In some cases, secured personal loans are also available. The security here can be your savings bank account, investments, any vehicle, or other property. A secured personal loan is undoubtedly a wise choice since it carries a comparatively lower rate of interest than an unsecured one and is easier to be approved for. However, be aware that as is the case with any other type of secured loan, the bank may seize your security if the regular repayments are not complied with.
Benefits of Personal Loans
Financing a crucial expense:
Since almost every bank, financial institution, and NBFC provides a personal loan facility; they are very convenient and easy to avail of whenever required. Personal loans are also given for various purposes, and their features vary according to them. Obtain a loan suitable for the purpose you need it. It can be for a medical emergency, for repair or reconstruction of your house, for a wedding, or for higher education.
As much as possible, personal loans should be brought into play for the major expenditure you can not otherwise provide for. And for the same reason, it’s advised that personal loans for vacations should be avoided unless it’s a trip you absolutely can’t miss. A personal loan EMI calculator will effectively demonstrate the monthly repayment burden you will have to bear in addition to your other finances.
Consolidating existing Credit Card debt with a personal loan:
This benefit is exclusively for credit card users. If you have one or more credit cards that charge high rates of interest, you can consolidate your credit card debts with a personal loan which will save you a significant amount of interest payments. The rates of interest charged on both credit cards and personal loans are higher, however, compared to most cards, personal loan interests are quite lesser, and hence when the debt merges, the interest rate will evidently be lesser. This way, it also becomes far easier to keep track of a single loan and repay it than keeping track of various credit cards and repaying the respective dues on time.
Paying off previous debts
While it’s true that other types of loans are comparatively less expensive than personal loans, they are not the most expensive type of credit. Suppose you had taken a loan in case of emergency in the past without any prior research, based on a friend’s or a relative’s recommendation. In that case, chances are you are being robbed with the hefty amount of interest by the lender.
In these cases, personal loans offer the best way out. You can choose a good lender offering a relatively lower rate of interest using a personal loan EMI calculator facility conveniently and pay off the previous debt carrying higher interest. However, pay attention to the processing fees, prepayments charges, foreclosure fees, and any other penalty that may be levied.
Improving the credit score
Personal loans can substantially improve your credit score, especially when you already have a debt burden and black history of late or non-payments. For this to work, however, you need to repay the personal loan diligently and timely. Proving that you are able to handle the credit efficiently, your credit score, based on the slightly positive credit mix, will improve.
That being said, you should not take on a new personal loan unnecessary solely for wanting to improve the credit score. You need to pay off the prevailing debts to maintain a good credit report, and having a significantly high debt ratio with late repayment is never a good proposition.
Personal loans are indeed very useful, but they are to be availed aptly in the proper circumstances. One must be aware that a personal loan signifies a debt and should be taken responsibly as other more beneficial credit facilities are available.