Looking for a way to repay your holiday debt? Or are you planning for a wedding? Either way, a personal loan will come to your rescue as it is a quick source of cash, typically with a lower interest rate than a credit card.
A significant advantage of a personal loan is the fact that it can be used for a large variety of purposes, unlike an auto loan or a home loan. An individual can avail a personal loan easily within a period of 24 hours, in some cases. So, instant loans have an appeal that is unparalleled.
Instant loans also enable customers to skip the tedious process of saving up for an event. People have found it to be more convenient to take a loan and pay it back in easy installments over a long period of time, as opposed to accumulating funds for the purpose. However, before you are completely enamoured by the simple and easy processing/disbursal of an instant loan, you should look into the traps that these loans deviously lay out.
Personal loan traps - what they are and how to avoid them?
Prepayment charges - Consider a scenario where you have availed a personal loan with a 2 year tenure. After a 6-month period if you are in an unprecedented situation where you can comfortably pay back the loan, you may inform the bank of the early payment. In such a situation, you may find that prepayment charges and rules imposed by the lender are beyond your expectations. You may then be forced to extend the loan repayment to avoid the heavy charges imposed on prepayment. Hence, at the time of availing the loan, it is important that you opt for a lender that offers free pre-closure of the loan.
Processing fee - Almost every personal loan that is unsecured is linked to a processing fee. Some lenders deduct this fee from the loan amount that has been approved. This is, in a way, a hidden prepayment charge, as the lender is attempting to prevent you from closing the loan early by imposing the processing fee. So when you are looking to avail an instant loan, it is advisable to check the annual percentage rate of the loan in addition to the rate of interest.
Shop around - Although you have been associated with a bank for all your financial needs, you are not obliged to take the option it lays out when you are in need of a personal loan. In most cases, your bank might not even offer you the best deal on your loan. This is because the bank considers you to be an easy customer to persuade in availing the loan due to your association with it. Therefore, it is imperative that you do a good amount of research and identify a loan that has the most suitable characteristics. There are several financial product comparison sites that offer you neutral results. You can make use of the facilities that these websites offer.
Insurance on personal loan - When you are offered a personal loan that comes with insurance (on life or job loss), you should understand the terms and conditions of the same. This is because you may be in for a shock when you later realise that these loans are associated with costs that may amount to a huge value in the long run. However, if you have a risk of layoff from your organisation within the next 6 months, you may consider opting for a job loss insurance with your instant loan.
Read the terms and conditions - The fine print of a personal loan document may be heavy in financial terminology that is difficult to understand. However, it is crucial that you read and understand the provisions carefully. You should not be influenced to take a personal loan for the attractive taglines that the salesperson projects. You should ideally assess your needs and understand the loan features well before you decide on it.
So, should you opt for a personal loan? The answer to this depends on your specific situation.
If you have an urgent need for cash but do not have any assets, then a personal loan is a viable option. But if you are someone who has assets such as gold, shares, or property, then it is advisable to get a loan against these assets. You will also get a lower interest rate when you pledge an asset as security while availing the loan.
Additionally, you should ensure that you are honouring your commitment to repay the loan. Failure to do so will have a negative impact on your credit score.
You should also assess if you can do away with the loan at all. While taking a personal loan may be useful in situations like medical emergencies, it may not be the best solution to fund your foreign holidays. So weigh out your options carefully before signing the dotted line.