Do Personal Loans Come With Higher Interest Rate: Here’s What You Should Know
Personal loans can be useful for meeting immediate financial requirements when you are cash crunched. Unlike house and car loans, which are meant for specific needs, personal loans may be used for meeting multiple needs. With advancements in technology, availing of personal loans has become an easier process.
Written by Web Desk Team | Published :December 20, 2022 , 10:32 am IST
Personal loans can be useful for meeting immediate financial requirements when you are cash crunched. Unlike house and car loans, which are meant for specific needs, personal loans may be used for meeting multiple needs. With advancements in technology, availing of personal loans has become an easier process. You can now compare the different available options and apply for them with just a tap on the smartphone. If you are a first-time borrower, there may be many doubts about the application process, loan disbursal, and the biggest of them all, the interest rates.
Though personal loans usually don’t require any collateral, it is often assumed that the interest rates for this category of loans are high.
If you compare it to many specific loan options for home and car, the interest rates of personal loans may appear to be higher. But, it is not always the case. The interest rate varies from lender to lender, and partially depends on the borrower’s CIBIL score. While people assume personal loans to be an expensive option, the general interest rates are somewhere between 9 to 18 per cent among the leading banks.
Depending upon your credit score, you may be able to avail a better deal on a personal loan. Another aspect that impacts the rate of interest is the tenure of the borrowing. With a shorter repayment window, the interest rates tend to be lower.
Unlike credit cards, you can use the loan amount in cash. Credit card companies tend to discourage cash transactions and charge higher processing fees and interest rates for cash withdrawals.
You are not required to pledge collateral, making it a better deal than other loan options that require a borrower to block an asset to proceed. However, some lenders may ask for a guarantor when they are not convinced about the borrower’s repayment capacity.
While the repayment tenure in personal loans is usually shorter, they do offer flexibility. The repayment tenure for most banks is usually between 1 to 5 years. In case you want to close the loan before the end of your tenure, you can do so. Some banks may charge prepayment fees. There are also lenders who offer only a minimum tenure for which the borrower must take monthly installments (EMI). Following the end of this minimum tenure, the borrowers can foreclose the loan without any extra charge.
Another, big misconception around personal loans is that you can not avail of one till you have pending debt. However, this may not be entirely true. Depending on the borrower’s repayment capacity and CIBIL score, the bank may accept the personal loan application. Regardless of the existing loans, the lender will assess your loan application based on your repayment capacity factoring in aspects like income, cash flow and existing liabilities.
The borrower can choose to repay all existing debts, from a single lender, through a consolidated monthly EMI.
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