Reasons For Choosing Personal Loan Over Traditional Loan

Be it goods or services, the price of everything is increasing a lot today. There are situations where people really need money and they do not have enough, at such times they choose to take a loan from their bank. For example - A wedding. In a country like India, where weddings are so expensive, people need money and a lot of them choose to take loans from the banks by giving some asset of theirs as security. Such type of loan is called the traditional loan wherein people give a collateral security when they borrow money from a financial institution.

People today prefer to take personal loans instead of traditional loans as it does not require any collateral security. Say, you want to go on a trip after continuously working for six months. You choose the place and prepare the plan, but when you look at the high rates of air tickets, you are forced to postpone your plan. In such a case, a lot of people, today, take a personal loan from their banks to pay for their travel and repay it later, in installments. This way they get to travel to their desired location and not worry about losing any asset either.

Some people think that there is no difference between traditional and personal loans, but it is not so. Traditional loans are secured loans while personal loans come under the category of unsecured loans. In traditional loans, when a borrower takes a loan from the bank and fails to repay the money, the bank takes over his collateral security. In personal loans, people do not have to worry about losing their assets (house or car) while borrowing money from the bank. The banks look at the credit history and reports of a person before giving him a personal loan. Based on his credit history, the bank decides a rate of interest and the amount it will lend him.

A personal loan is truly personal in nature as you do not need a specific reason for taking it. To take traditional loans, you need a specific reason. For example - you need the loan to buy a house. Another issue with traditional loans is the painful process of paperwork. There are forms which you have to fill and sign in person.  A personal loan, on the other hand, is easy to apply for as it has a very brief application. Some financiers provide personal loans within one or two working days and require only an e- signature.

A personal loan is not always about borrowing money from a bank. A lot of people get scared on hearing the word ‘bank’ as it makes them remember all their liabilities. Some people do not trust banks and try to find other sources for getting a loan. One recent trend is peer-to-peer lending also known as P2P lending. There are companies which have started this new personal loan business wherein borrowers list their loan requirements and investors (an individual or company) supply funds until the total amount is received by the borrower.

As everything has two sides to it, good and bad,  a personal loan also has its advantages as well as disadvantages. If a person applying for a personal loan does not have a good credit score, it is very likely that he will have to pay a very high rate of interest. Lenders also provide this loan after checking the credit history, so if a person has a bad credit history, they will think before lending money to him. A lot of companies deny loans to people with bad or no credit history.  There are also hidden fees which one should find out about, before taking a personal loan. For example- prepayment fee. Prepayment fee is charged when a person decides to pay his loan early. These are a few disadvantages of a personal loan.

Apart from the advantages mentioned above, a personal loan has one more benefit related to its rate of interest. The rate of interest on a personal loan is fixed in most cases. So, a person can plan the repayment process of his loan in advance.

Looking at all the pros and cons, a personal loan seems to be a better option than a traditional loan in many ways and easier to apply for. Today a lot of banks and financial institutions provide personal loans. One can check their websites to find out more information on the same.