Tuesday, April 29, 2008

Personal Loans and debt traps

I get marketing calls from various banks each day which informs me that due to my good credit history with the bank I become eligible for a preapproved Personal Loan for my disposal and is available at the nod of my head. Already bearing the burden of a Personal Loan, I know for sure that it’s the last thing I shall go for and I reply them that I am not interested.

Personal Loans are collateral free loans given out by banks. It’s an unsecured loan and hence banks charge exorbitant interest rates for it. Since the money borrowed using Personal Loans is less compared to other loans, the EMIs appear lesser (else banks will make the tenure higher and make it appear less) and hence people generally don’t think much about the total money they pay to the bank through EMIs over the tenure. There are few things one should know about Personal Loan and these are also the reasons why Personal Loan shall be the last thing one shall resort to while in need of cash.

1. The interest rates banks charge is typically in the range of 20%! Just think about a Gold Loan where the interest rate is around 7%

2. Most Personal Loans come with an initial processing fee of around 2%. Consider a Personal Loan of 1 Lakh, where the processing fee itself will take 2000 bucks off you

3. Banks charge a pre-payment penalty when the Personal Loan is closed before its tenure, which again take money out of you

Thus, despite having a very high interest rate, even more money is extorted by Personal Loans making it one of the costliest of all the loans and thus a debt trap. Hence go for Personal Loans only if there are no other options in front of you.

1 comment:

anna garcia said...

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