Personal loan is a unsecured loan and can be taken for certain purposes such as for renovation of house, to meet medical expenses, foreign travel, marriage expenses, purchasing consumer durables, higher education etc. But personal loan has set of advantages and disadvantages attached to it. The main advantage of a personal loan is the flexibility as it can be used for any purpose. Even the application process is comparatively simple with minimal documentation requirements. As the loan is unsecured thus there is no need for any kind of security or guarantor.
Although it appears to be good but these loans are quite difficult to acquire exclusively as these are unsecured. To get this loan the eligibility criteria depends upon the applicant’s income credit history with regard to any other loans and repayment capacity. The interest rates offered on these loans can vary between 15-25 percent depending on the credit profile, income level, and nature of employment of an applicant. If bank find a higher risk in lending to an applicant it might not sanction the loan or charge a high interest rate together with additional security in the form of a personal guarantee.
The loan amount to be sanctioned generally depends on personal income along with other factors like age, profession, education and repayment capability if any other loans have been taken etc. All these factors are also taken into consideration for setting the interest rates. For instance the interest rate might be lower for a person working with a reputed firm as compared to a self-employed person. The tenure for repayment of loan is normally between 12 and 60 months. Generally these loans are not sanctioned for more than five years.
The EMIs are calculated for the repayment of the loan and if a person wants to do prepayment of loan a penalty is charged. The processing fee might be calculated as a percentage of the loan amount for the documentation and verification formalities. Before signing on dotted lines one must study terms carefully whether there are any additional charges or penalties.
Some banks might set flat rates for personal loans. Apparently the rates might look lower than even the current home loan rates. But in actual the flat rate do not reflects the actual cost of the loan. Indeed the effective rate is much higher. It is included in the EMI and person pays it on a reducing balance basis. For instance a loan of Rs 1 lakh figured out at a flat rate of 12 percent with an EMI of Rs 3,800 for 36 months in fact is worked out to an effective interest rate of 22%.
Approximately the total interest of Rs 36,800 works out to a yearly interest of Rs 12,226 and in the same way the rate of 12 percent is quoted. This will be correct in case a person is paying onetime interest at the end of the tenure of the loan. EMIs are calculated from the first month on the principal outstanding, the interest is normally charged at 22%. Therefore check for flat rates of interest carefully and always choose for reducing balance rates. The right approach would be to take loan when there is dire need to do so. Although personal loans are easy to get but one should not burden him unnecessarily with high interest debt without a convincing reason.
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