Nowadays, loans are not only available for long-term goals such as buying a house or financing a wedding. You can also use a loan to fund your day-to-day expenses. It could be for a home renovation, a holiday, medical expenses, paying off the credit card bills, or buying a gift for loved ones. Such loans are called small personal loans. While a personal loan may come with a lot of benefits, they also have a few drawbacks. In this article, we will look at the pros and cons of taking a small personal loan.
What are the pros of taking a small personal loan?
By taking out a personal loan, you can avoid borrowing money from your friends and relatives. Other than that, here are some other benefits-
- Easy approval: A small loan will mean fewer fund requirements. Hence, no extensive documentation is required. As a result, processing and approval are quicker. With different platforms offering applications of small loans online, approval sometimes occurs within 24 hours as well.
- Quick access to funds: Faster loan approval means quicker access to funds. As a result, small personal loans are an ideal choice if you need immediate funds or are in an emergency.
- No collateral: Collateral is the security lenders require from borrowers in exchange for lending them money. The process can be stressful. As the amount to be borrowed is less, banks and financial institutions do not require collateral.
- Helps build credit: Before lending a loan, lenders check the creditworthiness of the borrower. If you have a poor credit score, lenders may not approve the loan or may approve it with very high-interest rates. By keeping up with payments on small loans, you can build your credit score. This will allow you to qualify for a higher loan amount in the future.
- No restriction on the use: A personal loan is a multipurpose loan. You can utilise it as you see fit. There are no restrictions on how to use it, whether to renovate the house, purchase a TV or pay off other debts.
What are the cons of taking a small personal loan?
- Credit damage: Small loans can help you build credit if you pay them off on time. However, if you default on the loan and do not make payments on time, it will negatively impact your credit score as well.
- Unnecessary debt: Personal loans can be used for any purpose. However, it is important to understand what is the reason and whether it is even worthwhile. In the end, personal loans are also debt, and if you are unable to repay them, you will be subjected to different penalties.
- Costs: As with other loans, personal loans also attract a lot of fees. There may be a processing fee, pre-payment charge, technical fee, or others. In addition, personal loans have higher processing fees than secured loans. It is crucial to review the terms and conditions carefully before taking out a personal loan.
- Higher interest rate: As these are unsecured loans, their interest rates are higher than secured loans. Thus, though these loans can meet your immediate needs, repayment may be a problem if you lack adequate funds.
In a nutshell, while a small personal loan may be a quick solution to our monetary needs, it still requires thorough research and discipline, just as other loans do. You can even use an online personal loan EMI calculator to plan your repayment strategy. This will help you determine how much debt you can take on. If necessary, consult an expert.