Personal loans are one of the easiest types of loans that you can apply for in times where you need fast cash. Its biggest benefit? There are no questions asked, no collateral needed, no criteria to be met. This is unlike other loans, such as those for education or mortgage, where you need to show proof of admission, or a home loan, where the house is used as collateral. While almost every bank provides personal loans, financial experts advise against taking these. Why?
This is because you’ll incur a higher interest rate charge compared to a collateralized loan. This seems fair, considering that the lender has no guarantee for the loan other than your own reputation. The amount of loan is calculated by taking into consideration your credit reputation – the current financial status of the borrower and his cash flow, such as monthly salary, side income, profit and loss in business and if there are outstanding loans to the borrower’s name.
So if there are only cons to this product, why does it exist? Can taking a personal loan be beneficial? Yes, it can, depending on the circumstances of the borrower. Here are three situations which justify taking a personal loan, provided there is no other option available, such as borrowing from parents or friends.
1. Settling a debt which has a high interest rate
If you are repaying a loan that has a higher interest rate compared to the personal loan, it will be better to opt for the latter, or choosing the lesser evil.
2. Paying off a large credit card bill
A personal loan can also be used to pay off a substantial credit card balance that is being rolled over for months. Paying just the minimum amount on the card bill will not help you as the interest charged over the total bill amount is very high, such as the case of 24 percent in Singapore. Another benefit of this is that as the card balance will now have been paid, you can continue using it to pay for purchases as well as to withdraw money in case of an emergency.
3. For higher education
The personal loan can be used in situations where you may need money fairly quickly and cannot provide proof of admission on time, or when you need more funding if you do not want to pledge collateral. However, take this route only when you cannot get an education loan or if you need to top up the funding.
Where should I get a personal loan?
You can get personal loans from banks or payday lenders. Over here at Enjoycompare, we have helped you by listing the headline rates, loan periods and privileges provided by loans from the different banks.
Some fine details to watch out for with personal loans
Prepayment penalties – When a bank provides a loan, it estimates the amount of money it can make by lending that money. Paying off the loan earlier means eating into their profit since you will pay less interest now. In order to keep their books straight, some banks charge a fee for paying off the loan before a certain date. Such fees are calledprepayment penalties or exit fees. Be sure to look for the words “no prepayment penalty” on your loan term when you apply.
Accidental overdrafts – If you link your loan to your savings account for automatic payments, you might be in danger of an overdraft. To avoid this, consider, Opting out of automatic payments and setting up a low balance alert with your bank.