A personal loan is like any other loan wherein the lender provides the borrower with a certain amount of money that must be repaid with interest over the agreed-upon duration.
Compared to other types of loans, such loans are readily available and often provided without any collateral. In today’s economy, digital banks like Alex Bank are paving the way for future banking services with attractive interest rates and ease of banking.
Online banks make it much easier for a person to take a personal loan. However, personal loans’ interest rates and repayment plans vary as per the lender, eligibility, and many other factors.
But, what are the benefits of obtaining a personal loan?
Before diving into the benefits of a personal loan, you should understand the two different types of loans.
- 1 Types of Loans
- 2 Benefits of a personal loan
- 3 Requirements to apply for a personal loan.
Types of Loans
These types of loans mandate a person to offer something to the lender as collateral, which the lender can use to recover the dues if the borrower is unable to repay the loan.
An unsecured loan does not require the borrower to offer collateral, and the risk lies with the lender.
Benefits of a personal loan
The loaned amount can be used for various things
When you take a personal loan, there are several things you can do with it.
- Cover Unexpected expenses – Some sudden expenses cannot be predicted. A personal loan is more effective in covering such unexpected expenses.
- Finance a wedding – A wedding can burn a hole in your pocket, and even if you have ample savings, weddings can cost an average of $30,000.
- Remodelling projects – If there is an immediate need for a significant renovation, you can take a personal loan to cover remodelling expenses.
- Buy a vehicle – You need a separate car loan for brand new cars, but you can buy a used car with personal loans. This way, you get a chance to spread the cost of your vehicle over the years.
- Vacation – When you take a personal loan for vacations, you can visit your dream destinations and pay back the total cost of your holiday in instalments.
A personal loan enables you to consolidate your debts
Personal loans can be used to reduce other loans as you may be able to take a loan at a lower interest rate and use the amount to pay off higher-interest debts.
This makes it convenient to manage and track different loan payments since you only have to pay back the one loan which has consolidated all your other debts. So, there is no need to keep up with the payments, manage accounts, and trace different payment schedules.
It helps you maintain a good credit history
Building a good credit history is essential to determine whether you get any loans in the future and at what interest rate.
When you pay monthly loan payments on time, it helps you build a credit score.
The better your credit score, the lower the interest on your loans would be. This reduces the total cost of the loan in the long run. Moreover, insurance companies often check credit history to calculate premiums.
Saving money for a rainy day is a healthy habit. Still, unexpected situations can often arise, which might require you to liquidate the savings. Examples of such scenarios include accidents, car repairs, house repairs, etc.
Such sudden expenses cause concern because spending your savings will leave you vulnerable to future unexpected expenditures.
However, opting for a personal loan ensures your savings are maintained since you can pay it back every month. This spreads the cost over a long time while also reducing your burden.
Collateral is not usually required
As explained, there are two types of loans: secured and unsecured. Personal loans are often unsecured loans wherein the lender bears all the risk. While this is a risk for the lender, it is beneficial for the borrower as defaulting has minimal consequences.
Requirements to apply for a personal loan.
The specificity of documentation you need for a loan may vary depending on the financial institutions. Having some knowledge can make the process faster and improve your chances of qualifying.
- Credit History – The overall credit score and history are among the most important factors a lender will assess while evaluating a loan application.
- Income – Financial institutions impose a minimum income requirement before dispersing a loan. The minimum requirement depends on the lender, and as proof, tax returns, bank statements, and pay stubs are needed.
- Debt to income ratio – The debt to income (DTI) ratio expresses the portion of the borrower’s monthly income that goes into paying other debts.