This is the age of technological advancements and digitisation, requiring instant gratification. The fast-paced lifestyle has necessitated the need for continual funds, increasing the need for loans. Getting secured loans quickly may not be possible due to the lengthy loan approval process time. At such times, a personal loan could be a great borrowing option.
A personal loan is a type of unsecured loan, which helps an individual to meet their various expenses, including medical, education, etc., on time. Through personal loan EMI calculators, an individual can now estimate and customise their loan and get flexible repayment options.
Though popular for a quicker approval process, personal loan interest rates and charges are higher than secured loans, making it a risky option. A personal loan is thus a huge commitment and could be very challenging.
Let us then explore the common problems faced by individuals after availing of a personal loan.
Common Problems faced after availing a Personal Loan
Personal loans are risky due to the common features as stated below.
Higher Interest Rates
The interest component of a personal loan is an important aspect to be given due consideration as it defines the overall cost of the loan. Being an unsecured loan, a personal loan carries a higher rate of interest as compared to secured loans. Typically, the yearly personal loan interest rate ranges between 10.5% – 24%, based on the personal loan eligibility criteria of the lender. The interest rate is around 2-3% higher than other loans, increasing the borrowing cost for the borrower. This high-interest charge could even lead to a default on repayment of the loan for a borrower with limited financial means.
Higher Processing Fee
Banks and NBFCs charge a processing fee based on a specific percentage of the total loan amount. This charge could normally be higher for a personal loan as compared to a secured loan. This means that an individual would get a lower amount sanctioned than applied for.
Stringent Eligibility Criteria
Due to the nature of personal loans, lenders have stringent eligibility criteria before granting such loans. A good credit score is a basic necessity apart from minimum and stable income requirements. A new borrower with no credit history may thus find it difficult to avail of personal loans, or may have to pay a higher rate of interest.
Loan Default Impacts Credit Score
Any default on the payment of a personal loan could adversely impact your credit score and potential capability for availing of future loans. Borrowers should thus ensure they have sufficient funds to make timely repayment of their loans; otherwise, this could lead to an increase in borrowing costs.
Rigidity in Repayment Terms
Borrowers get flexible repayment options, such as choosing the tenure of repayment. However, most lenders do not allow any change in the option chosen once the loan has been granted. This makes it difficult for borrowers if they want to get better loan terms like part payment or prepayment of the loan.
Penal Charges on Loan Default
Personal loans carry various penal charges, including bounce charges, loan cancellation charges, and similar charges. Any default on the payment of personal loan EMIs could attract penal charges for the borrower.
A personal loan is an excellent loan option for supporting your immediate financial needs. Key factors impacting a personal loan interest rates include your credit score, repayment history, stable income, employment with a credible organisation (for a salaried borrower), and debt/income ratio. It is, therefore, important to understand the benefits and drawbacks offered by a personal loan, to get the maximum benefit at minimum cost.