2 September 2023

Advantages and disadvantages of personal loans in India

Advantages and disadvantages of personal loans in India

Personal loans have become a prevalent financial instrument in India, offering individuals the flexibility to meet a wide range of financial needs and could be an advantage or even a disadvantage (Photo: Pexels.com).
However, like any financial product, they come with their own set of pros and cons.

We’ll now delve into these issues of personal loans in India to help you make informed financial decisions.

Advantages of personal loans in India

Versatility of personal loans

One of the most significant advantages of personal loans is their versatility.

Borrowers can use the funds for various purposes, such as medical emergencies, travel, education expenses, home renovation, marriages or debt consolidation.

Quick approval and disbursal

Personal loans in India are known for their swift approval and disbursement.

Many lenders offer instant approval, and funds are typically disbursed within a few days, making them ideal for urgent financial needs.

No collateral required

Unlike secured loans like home or car loans, personal loans are unsecured, implying you don’t have to pledge any collateral or assets to secure the loan.

Fixed interest rates

Most personal loans come with fixed interest rates, ensuring that your equated monthly instalment (EMI) remains constant throughout the loan tenure.

This stability simplifies budgeting and financial planning.

Minimal documentation

Lenders in India have streamlined the documentation requirements for personal loans, reducing paperwork and making the application process hassle-free.

You usually need an AADHAAR card and a PAN card along with your passport size photograph to secure your personal loan.

Disadvantages of personal loans in India

Higher interest rates

Personal loans often carry higher interest rates compared to secured loans, primarily because they are unsecured.

Borrowers with lower credit scores may face even higher interest rates, increasing the overall cost of borrowing.

Interest rates normally range from 9 per cent (usually by public sector banks) to 24 per cent for private banks and non-banking financial companies or NBFCs.

Personal loan example

For instance, if you take a personal loan of Rs 100,000 or Rs 1 lakh from HDFC Bank with an interest rate of 20 per cent for a period of 5 years.

Your EMI will be Rs 2,649 a month and your total repayment amount will be Rs 158,963 or almost Rs 1.59 lakh.

So, the total interest you will pay is Rs 58,963 in the five-year period of your loan.

Shorter tenure

Personal loans typically come with shorter repayment tenures compared to other loans.

While this can be advantageous for some, it can also result in higher EMIs, potentially straining your monthly budget.

Risk of overborrowing

The ease of obtaining personal loans can lead to overborrowing.

Borrowers may take on more debt than they can manage. This may lead to financial stress and difficulties in repayment.

Impact on credit score

Defaulting on personal loan payments can have a negative impact on your credit score, making it harder to access credit in the future.

It’s crucial to ensure timely repayments to maintain a healthy credit profile.

Hidden charges

Some lenders may impose hidden charges such as processing fees, prepayment penalties, or late payment fees.

It’s essential to carefully review the loan agreement to avoid unexpected costs.


Also consider their disadvantages, including higher interest rates, potential for overborrowing, and the risk of damaging your credit score.

Prior to applying for a personal loan, assess your financial situation, determine your repayment capacity, and carefully review the terms and conditions of the bank or NBFC before taking one.

Remember that while personal loans can be a valuable financial tool, responsible borrowing and timely repayments are crucial to make the most of their advantages while minimizing their disadvantages.

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