How Personal Loans Are Different From Other Modes Of Financing?

by Aaina Khan Insurance Consultant

Unsecured loans are usually granted based on one’s credit history and credit score to determine whether he or she qualifies to be granted a personal loan or not. In contrast, personal loans are advanced based on one’s income level and repaying capacity. While business purpose loans, vehicle, and home loans, etc. require a loan to use those loans for specific purposes, personal loans don’t have any similar requirements. Rather one can use a personal loan for almost any purpose, so long as it is within the framework of the lender’s policy/terms and conditions.

 

Personal loans are normally granted as unsecured loans. Thus, the loan is not required to offer collateral in case he does not repay the loan. Hence, there is nothing for a lender to seize if you take out an unsecured loan and do not repay it. However, there are certain consequences, e.g. one’s credit score will plummet and the loan can be treated as a defaulter. Secured loans, on the other hand, require collateral, like your business assets, home, or your vehicle in the case of an auto loan. If one does not pay back a secured loan, the lender could seize his assets to recover the loan and/or interest thereon.

 

Personal loans are different from credit cards, which are a type of revolving credit. Credit cards are used as required up to a certain amount, or your credit limit. As long as one makes timely payments, one can continue to spend up to the credit limit of the card whereas personal loans are usually awarded in a lump sum, and the loan is required to make monthly repayments until the entire amount of the loan is repaid along with interest thereon.

 

Of course, before going for a personal loan, one must try to learn the procedure for getting a personal loan. Nowadays, especially due to the current pandemic caused by COVID-19, most banks are providing online personal loans in India. Many of them have created their Loan Apps also for facilitating prospective applicants to apply for personal loans from the ease of sitting at their homes, thus avoiding to expose themselves to the pandemic.

 

Reasons for not choosing a Personal Loan

While personal loans can be a saving grace in times of great need, there are some instances you should avoid borrowing money, e.g. the following:

 

• Say if one can’t afford it. Borrowing money in the short term is one thing, but, one will still need to pay it back. So, if one can’t afford monthly payments for your new personal loan, one must consider skipping it.

 

• You don’t need it. If you’re taking out a personal loan to cover the cost of a vacation or something you don’t need in the immediate future, then try to avoid it or at least postpone it until you have more cash on hand.

 

• There may be some better options available. For home renovation and repairs, a renovation loan might be a better choice. For the purchase of a vehicle, you may save money with a vehicle loan.

 

• At the time it would be better not to go for an EMI in the heat of the moment, because it would only add to the number of interest rates for buying something, which could be bought six months down the lane, without paying for the interest rates. 

 

One ought to evaluate all available options before deciding to take out a personal loan. Borrowing money shouldn’t be done without a pre-thought. One must review one’s financial situation to see if a personal loan is the right choice or not.

 

Thus, personal loans work flexibly as compared to traditional secured loans. But, when there is a need of the hour, a personal loan could always be considered. 

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Created on Jan 1st 2021 03:52. Viewed 348 times.

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