In this article, you will learn not just about the cool benefits of a Personal Loan but you will also learn about some better alternatives that are available to you.
Benefits of Obtaining a Personal Loan (Jump To Section)
What Is A Personal Loan?
Before we dive into the benefits of obtaining a personal loan, let’s take a look at what a personal loan is. A personal loan is a specific type of credit that you can borrow to fulfill your instant requirements/needs/emergencies. In today’s world, personal loans are very popular. For instance, gold loans or car loans require a lot of paperwork but these loans do not require any guarantee or security and do not require much documentation. A personal loan is also known as a Consumer loan and is a multi-purpose loan. This is a flexible loan. One can take this loan for personal expenses.
A personal loan is easy enough to apply for compared to the other types of loans as sometimes offers are automatically offered in your respective accounts. These loans are given based on your job, occupation, income level, credit history, etc. you can get loans up to $1000 to $50,000 or more. You can get a low-interest rate to repay it. If your credit score is low then you will get this loan with high interest.
It can be granted for any financial purpose because this is a multipurpose loan. You can also apply for this loan jointly with your spouse or parents. By applying for a joint loan you can take a higher loan from the bank but if your co-borrower has a bad credit history, then there are several chances that your loan can be refused. This loan is mostly unsecured because of the absence of collateral. This type of loan may lead to high pressure and stress for you.
The savings account balance secures these loans. This loan will be repaid in installments as calculated by the bank. The monthly payment is capped at about 40% – 50% of your monthly income. This loan is shown in your credit report. This loan is very quick compared to others as it provides you money within 48 hours which is very beneficial in case of any emergency. It is one of the best ways by which you can build a good credit reputation that is best for your business and your purchasing power will be expended.
How to Apply for a Personal Loan?
The following steps will guide you on how to take a personal loan.
● To apply for a personal loan, you have to check whether you are qualified for it or not as per the guidelines of the bank.
● Then you should check the additional charges and interest amount. Does it fulfill your needs?
● Then you should calculate how many instalments you have to pay.
● Then you should check whether you have the required documents or not.
● Then fill out the application.
● And wait for the response of the bank.
How to Repay a Personal Loan?
You should make calculations by rounding up your monthly payments and making one extra payment each year. You should increase your income and make efforts to pay off your loan as early as possible. If you want to repay a personal loan early you can submit your money in weeks instead of submitting in months. Repaying your loan is very good for your finances. It has a very good effect on your credit score and lessens your burden as well.
Benefits of Obtaining a Personal Loan
These are the top benefits of obtaining a personal loan.
● You can get this loan with a single click as sometimes it is already offered in your savings account. With this, it saves your time and makes it convenient for you.
● Other loans like gold loans, car loans, education loans, and housing loans require many documents like salary proof, identity proof, address proof, Guarantor ( which is very difficult to get), etc. but on the other hand, no documents and guarantor are required for such loans, so getting them is very easy.
● Other loans require collateral, which is an asset that banks keep as security but in personal loans, no collateral is required which makes it easier to apply for it and our savings account and our balance are the collateral. Some people do not have any collateral in their name so they can’t mortgage it in the bank.
● It is a Versatile loan that can be used for different purposes. For eg. meeting the expenses of medical emergencies, renovating a home i.e your dream house, repayment of another loan, buying some luxury items, and many more.
● These loans are given based on your job, occupation, income level, credit history, etc. Keeping in mind the profile of your account interest rate is offered.
● It is a quick loan to get. We can get it within 48 hours which is much quicker than other loans.
● Any emergencies can be tackled by this easy and quick loan. For eg. If you want to repay another loan you can take this loan for repayment, this will give you extra time for repayment and maintain your CIBIL score.
● This loan can be taken for meeting any kind of financial assistance. For eg. home renovation etc.
Demerits of Obtaining a Personal Loan
● If you take these loans regularly then this will put you in a debt trap from which it is very difficult to recover.
● You have to pay high interest with the principal.
● Late payments will damage your credit score which will make it difficult for you to take any other loan.
● Interest can be higher sometimes.
● This shows that you are in financial trouble.
● Loans may lead to high pressure on your mind.
What is a 401k Loan?
401k loans are loans that a person can borrow from his/her retirement savings and repay with the interest amount. 401k loans are an easy facility provided for persons who are in jobs. 401k loans have no impact on credit scores as such loans are not reported to the credit bearer. In this loan, a person is borrowing money from his/her savings. You can take these loans of up to $50,000. It is a simple process by which you can satisfy your needs from savings of your own. If you need funds, you should go for a 401(k) loan rather than going to any bank.
You can take loans up to 50% of your invested balance. You can repay the 401k loan within 5 years which is medium-term. you can take this single loan at a time and you must repay that before you can take another one. This is a better loan that you can take because the interest goes to your account rather than going to any bank. If you leave your job you have to pay this loan in full. If you take this loan before a certain age limit then high penalties can be charged.
This is a helpful loan but if you do not repay this will make you pay higher interest. You should not ruin your savings until and unless it is an emergency. The money that grows in your account depends upon the money in your plan. This is a flexible loan.
Uses of 401(k) Loan
You can use this loan for the below-given purposes.
● This loan can be used for your home/apartment renovation otherwise, to get a housing loan one has to accomplish a lot of paperwork/requirements/ collateral, etc.
● If you have to start a new business you can go for this loan as it is very easy to apply.
● For meeting any emergency like the medical bills you can instantly process a 401k loan as sometimes you don’t have enough savings in your account.
● If you want to buy gold, two-wheeler, or four-wheeler and have to make down payments 401k loan can be applied instantly.
● If you require funds for higher education for your near and dear, this loan will solve the purpose.
How to apply for a 401(k) loan?
● For a 401(k) loan you have to consult your boss. If he agrees then the following steps must be done.
● One should read all the terms and conditions and agree to them.
● Then fill out all the paperwork and requirements which are required for the loan.
● And receive the loan to fulfil your needs.
● Do not forget to repay the loan as per the instalments settled.
How to repay a 401(k) loan?
If you take a 401(k) loan you must repay it within 5 years as it is a medium-term loan. you can repay this loan in the form of instalments. You should pay this loan along with its interest amount. If you don’t pay this loan, it will reduce your retirement funds. If you like then you can overpay this loan as well. It will give you an extra amount for your retirement.
Merits of 401(k) loan
● It is very easy and quick to apply for.
● It has fewer paper formalities.
● This loan provides you with lower interest rates than credit cards.
● In this, you pay interest to yourself rather than paying to any bank.
● Other loans require collateral but in this loan, no collateral is required.
● This loan can be used for different purposes .for eg. medical emergency
Demerits of 401(k) loan
● If you leave the job then you have to pay all the loans with interest and will not get a retirement loan.
● Taking money from a 401(k) loan means your financial growth is not stable which is not a good sign for your financial health.
● Growing your money depends on already existing money in your retirement Savings account.
● If you take this loan before a fixed age then high penalties can be charged to them.
401k Loan vs Personal Loan
● In a 401(k) loan, you borrow money from your retirement savings account and on the other hand personal loans are taken from banks as credit.
● In a 401(k) loan, you are removing money from your retirement account which is going tax-free and on the other hand personal loans are taken on fixed interest from banks.
● In a 401(k) loan, you can get 50% of your savings but in a personal loan, you can get the loan as per your requirement/need and according to the amount sanctioned by the bank.
● In a 401(k) loan, you will have to repay your borrowed money back with interest within the time limit which is up to 5 years after taking your loan but in a personal loan, your EMI is calculated according to the loan taken.
● In a 401(k) loan, You will have to take the consent from your spouse/partner to take such loans but no consent is required from the spouse/partner in a personal loan.
● When you opt for 401(k) loans, you do not have to pay taxes and penalties but the interest you pay on the loan amount goes back into your retirement plan amount whereas you have to repay the principal and interest amount in a personal loan.
● If you miss an instalment on your 401(k) loan it will show no impact on your credit score because such loans are not reported to the credit bearer but non-repayment of your instalment of a personal loan has a direct impact on your credit score.
What Is A Payday Loan?
A payday loan is a type of credit that is taken for a small-time i.e short-term loan. It is mostly taken for a month, generally two or four weeks. You can take a payday loan generally for $500 or less. This amount can vary in your state. $500 is the common loan limit. This loan can be given in the form of cash or a cheque. This loan is unsecured and is given at high rates of interest.
Payday loans are based on how much you earn and how much your salary is. People can have different experiences repaying the same funds due to the variation in terms and conditions and interest rates. They charge you high interest after calculating your total earnings/ salary. Payday loans charge a high interest with an APR which is around 400%. It is repaid by your next salary or 30 days from the day loan was taken.
These loans are not shown in your credit report. This can be a very dangerous loan as this can push a person into a debt trap which is a cycle of debt from which it is very difficult to recover yourself and repay the amount.
Why choose Payday loans?
Payday loans are taken for the following reasons/emergencies.
● If the deadline for your rent is due and you don’t have any money, then you can go for it.
● If your salary is late and you have spent all your money and you don’t have enough money for your food then you can get this loan.
● If your Credit card repayment is near and you don’t have enough money/savings in your account to repay it you can get this and so on.
How to apply for a payday loan?
● First of all, you have to fill in your personal information as per the instructions.
● Then you have to show the bank proof that you are employed i.e salary proof & some ID proofs.
● Then you have to provide them with your bank account details which should be correct.
● Then you have to agree with all terms and conditions mentioned.
● After this simple process, receive the loan and use it as per your needs.
How to repay a payday loan?
You have to repay this loan in a single repayment and if you fail to do so then you have to make a post-dated cheque for the full balance and interest, then the lender will cash the cheque from your bank and if there is no payment in your bank then if your pension or other social security will be debited in your account the lender is free to withdraw his loan. You can also give cash. If you are still out of money and have to repay this loan you can go to your family and friends and ask for money. If you still can’t pay off your loan then you can try to go into a debt settlement program.
Merits of payday loans
● It is a very quick loan that you can get at the time of emergency.
● It requires less paperwork/documentation process than other loans.
● This loan is easy and quick to access.
● This loan does not require any collateral or guarantor.
● This loan can be used for multiple purposes like credit card repayment etc.
Demerits of payday loans
● These loans charge a high rate of interest which makes them very difficult to repay in one single installment.
● This led to a debt trap, a cycle of debt from which it sometimes becomes impossible to recover.
● Predatory loans are known to be greedy.
● In this loan, the lender has full access to your bank.
● They charge high additional fees/charges.
● Taking this loan shows that you are in financial trouble which is not a positive sign for your financial status.
Payday Loan vs Personal Loan
● A personal loan is taken when you need a large amount of money for your needs which is up to $50,000 but a payday loan is taken when you need a small amount of money which is up to $500.
● A personal loan is repaid in several years but a payday loan is repaid within a month generally in two or more weeks which is very short term.
● Personal loans are generally given at low rates of interest and on the other hand payday loans are given at high rates of interest so they fulfil the urgent requirement but are very expensive.
● Personal loans are much better as they are given at low rates of interest and payday loans charge a high interest with an APR which is around 400%.
● A personal loan can show in your credit report on the other hand payday loans are not shown in your credit report.
Till now, we have discussed 3 kinds of loans and their pros and cons. The three loans are a personal loan, a 401(k) loan, and a payday loan. All these three loans are easy to get and are quicker than any other loan. These need less documentation. Any of these three loans do not require any collateral which helps many people who do not have it and any guarantor which is very difficult to arrange. These loans help you out in case of emergency. These loans are multi-purpose and can be used for anything. These can be used for credit card repayment, medical emergencies, renovating a home, and many more.
Personal loan and 401(k) loan gives loan at less interest rate than credit cards whereas payday loan gives money at a high rate of interest. These loans are unsecured and can lead you to a debt trap which is a cycle of debt from which it becomes very difficult to repay the loan.
If you take loans and repay them on time then it has a very good impact on your credit score. We should avoid taking loans because loans can be very dangerous, if not paid on time. We have to pay interest with the original amount which makes it difficult to pay it. If your credit score is high then you can get less rate of interest on your loan.
Taking a loan is good as it can help you to meet several of your needs such as wedding expenses, medical bills, and financing your vehicle but it is bad at the same time as taking loans shows that you are in financial trouble. There may come a situation where you are unable to repay the loan amount with an additional interest amount. The top problem that people face is paying off all amounts with additional interest.
Overall, you should take a loan when you know you can repay it with a certain interest. But if you are in a situation where you can’t repay it, you should avoid it.
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