Personal loans are loans that banks offer without securing any asset or property that you own. These loans are also called ‘únsecured loans’ and are most often taken to meet immediate or urgent financial needs that crop up from time to time. Like all other loans, personal loans bear a particular rate of interest that is mutually agreed between the two parties, the borrower as well as the lender. In the Philippines, interest rates for personal loans vary from one lender to another and are more often than not, quoted monthly.
Personal loans are the easiest to request for or borrow because there isn’t much documentation involved and it is unlike the other kind of loans in the market where you use your house as security against the loan or admission related documents for an education loan.
Why then do banks provide personal loans? Why don’t they ask for a security against the loan? What is the tradeoff here?
The main reason is that personal loans are given out at very high rates of interest that range anywhere between 15% to 30% are therefore the most expensive loans available.
To be eligible to apply for a personal loan, one must provide details of their current employment for identification and assessment purposes. Employment status can be provided through income tax returns filed for the previous financial year or salary slips and the lenders would ideally get back to you in 2 to 3 working days if the request for loan is approved and another day for the payout itself.
There are plenty of financial institutions in the Philippines who are making making loans available to customers who are in need of them. Today, the most competitive personal loans are available with the help of personal loan calculators where you just have to enter the amount of loan you require and the period of time you could repay it. You can instantly view the monthly EMI repayments specific to each bank based on the rate of interest that they offer. Because of the advancement in technology and the convenience factor, trends show that application of personal loans online has been increasing in the Philippines.
- Try not to take a personal loan to satisfy a commodity or consumption based hunger like buying a TV or a car. Ideally, we’d prefer to avoid taking a personal loan for a holiday and travel expenses as well.
- Go for a personal loan in times of emergency. However, be sure that you will be able to pay back the loan on time.
- Opting in for a personal loan is a great choice if it results in savings overall. The loan should help you gain possession of an asset, the value of which is going to appreciate over a period of time. This will help you generate an inflow of cash, to either help repay the loan or act as a long term savings.
You must be wondering how taking a personal loan can actually be beneficial, in spite of the extremely high rates of interest. It definitely can be beneficial depending on the circumstances of the person taking the loan.
Here are three situations, where you can opt in for a personal loan when all other options including borrowing from family or friends do not seem feasible.
- Settling a large credit card balance
- Clearing a debt that has a higher rate of interest
- Opting for higher education
A personal loan can be used to settle a huge outstanding credit card balance if the amount is being rolled over a large period of time. Paying just the minimum amount is not enough because the rates on interest charged over the bill is considerably high. It is advisable to divert this as a fixed EMI of a personal loan. You will have the liberty to choose the time frame in which you’d repay the loan and thereby reduce the tenor over which you will be repaying the borrowed amount.
Let’s say you are repaying a debt which has a very high rate of interest, it is advisable to close that with a personal loan. A personal loan from a bank will give you the opportunity to create a clean repayment record thereby creating a good credit history. This can be later leveraged to get loans of higher amounts at much lower rates.
Taking a personal loan for a professional course is feasible if it is on an emergency basis and you are unable to provide admission related documents on an immediate basis. This is also very helpful if you need a large amount of money and do not want to pledge any collateral against this loan. This is considered as a great option because education as an asset is guaranteed to provide good returns all though your life. The price one pays for this is the interest on the loan and a simple lifestyle till you land yourself that lucrative compensation package and pay off the loan.
Pros of Taking Personal Loan
- With a personal loan, you will be able to borrow more than you would with a credit card
- Since the EMI of your personal loan will be a fixed amount every month, it is easier to budget than live with the uncertainty of the amount you will have to pay the next month.
- In most cases, the rate of interest on the personal loan is fixed as well.
- With a personal loan, you can choose the tenure over which you can repay the personal loan. The amount of interest you are charged is proportionate to the length of the tenure of the loan.
Cons of Taking Personal Loan
- The rate of interest are really high if you want to apply for a loan of a small amount.
- The more you borrow, lesser the rate of interest is going to be. This might tempt you to take a bigger loan than you need.
- Sometimes, you might have to incur an early repayment charge if you want to pre-close the loan or pay it off early.