One of the many available types of borrowings is a Personal Loan. This is the most preferred form of loan as there is no restriction on the purpose of its use.
Flexibility of a Personal Loan
A loan meant for a specific purpose needs to be used in the appropriate manner, as the lending authority will monitor it. With a personal loan the flexibility of usage is far higher as it is meant for personal use. The borrower can be more at ease while making use of this type of loan, as there is no strict vigil over it. However, this doesn’t mean that there will be no questions asked at all on the need for the loan. At the time of borrowing there is bound to be a questioning on the intention for the loan. This is done for documentation purposes and the restrictions on the reasons for lending.
Higher Rate of Interest
A personal loan brings flexibility in the nature of spending, but to compensate for this the lenders charge a higher rate of interest. A loan for a specific purpose brings in the security to recover the funds, as the asset will be held against the loan taken and the money can be leant at a lower interest rate. With the absence of such securities for a personal loan, the lenders make up with a higher rate of interest making it costlier.
Lender's Risk
A personal loan does not provide a security for the lender as it does for a specific loan. With the lack of a security in the form of an asset, the lender faces a greater risk of recovering the amount lent.To compensate for this risk, the rate of interest charged is higher that other loans.
Management of a Personal Loan
As there are no restrictions on the use of a personal loan, there is a possibility that it could me misused. For this adequate control is to be taken over the loan to make sure that it is properly managed.
1.
Calculating the Rate of Interest
The rate of interest is used as a selling factor for personal loans. These loans are pushed off with an annual interest rate of just 0.99% or 1.49%, which in reality is on a monthly basis. This rate calculated on a monthly basis leads up to an annual rate of 24-25%. For this purpose a person availing a personal loan should calculate the rate of interest for him to evaluate the extent of interest payable.
The impact on calculation of the interest rate on a flat basis is greater than that on the reducing balance. Although, the interest will on the flat rate basis will seems lower at the beginning, the end cost of this method will lead to a greater value than the reducing method due to the continuity of the same amount of interest throughout. With the reducing capital, the interest on the reducing balance will seemingly decrease.
In a nutshell, you need to do your arithmetic. You can use our wide range of Financial Calculators for this
purpose.
2.
Need for a Loan
There are numerous opportunities to avail a loan and financing institutions have spared no effort to push their
services. This brings in a situation where an individual is made to believe that he or she requires a loan. With this
mind frame people tend to take loans without assessing the necessity for it and think of ways to spend it after
availing of it. One should always determine the cause for opting for a loan and get one only if there is an
absolute necessary.
3.
Extracting the Benefit
Since a loan is there for the taking with the numerous offers, there is a tendency to avail of it and use it in an
unproductive manner. While incurring expenses with a loan one should ensure that the benefit of availing a loan is
extracted. If the loan is not spent for productive reasons it would lead to a situation of discomfort as the
repayment of the loan is going to be coming for regular expenses of day-to-day life.
4.
Repayment is a Must Availing loans is the primary thought of borrowers and the repayment is hardly taken into consideration. With
these types of loans that yield high rates of interest, the borrower should set it as the priority to have it written off
the book of dues at the earliest. An outstanding with this type of borrowing could swell the amount of interest to
be paid.
Effective Management of a Personal Loan
Check for the rate of interest and an alternative mode of repaying it with a lower interest value. Calculate the interest on the flat rate and reducing rate of interest to determine the real value of the loan. Check for a facility wherein the loam amount can by paid off in bulk payments over several installments. Ensure payment of all EMIs without skipping a single payment to avoid adding value to the already existing high rate of interest. Mark out all possible funds to clear off the loan and get rid of the high costs.
Check for the rate of interest and an alternative mode of repaying it with a lower interest value.