Understanding your immediate needs and financial situation and matching them with the right product or service offered by your bank will help you stay on top of your finances. Personal loan from your bank can be a smart and convenient solution to some of

Personal loan is a type of unsecured loan provided to borrowers to meet their personal financial needs that is supported by their credit worthiness and cash flow. An unsecured loan is one that is obtained without the use of property as collateral and is generally provided to borrowers against their own personal guarantee. In this type of loan borrowers are not required to own a fixed asset or provide fixed assets as security.

Is personal loan the right option for you?

The first question you need to ask yourself is the same question your loan officer will ask: what is purpose of the loan? You do not want to mortgage your property, and go through an extensive loan processing and take out a long-term loan to meet immediate need for cash for a relatively shorter period. At the same time, if you don’t have assets or don’t want to take out loan against your assets then cash withdrawal through your credit card might seem like a quick solution. However, the high interest rates on credit card make this an expensive solution.

Personal loan are thus your best ally when you need funds on short notice that offer much better option than dipping into your credit card. Usually these are installment based loans where borrowers pay a fixed amount every month over the tenure of the loan. Flexible loan tenures are offered ranging from as short as twelve months to a maximum of sixty months.

The target market for such loans are generally individuals employed with reputed employers with regular salary, and existing clients of banks with sound credit history, and professionals such as doctors, engineers, architects, chartered accountant, etc. All financial intuitions have their own product paper to guide them while issuing personal loans. However, there are certain mandatory requirements set by Nepal Rastra Bank (NRB) mentioned below that need to be adhered to when providing collateral free loans against personal guarantee:

  • Permanent Account Number (PAN) card of the applicant must be recorded.
  • Account statement evidencing applicant’s monthly income (salary/ pension / rental income etc).
  • Maximum loan amount is restricted up to Rs 1.50 million and loan tenure up to five years.

 

The pros of personal loan

You can improve your overall financial situation as there is a great flexibility in terms of reasons for taking of the loan. You can get a personal loan to pay off high interest debts such as those from credit card, to upgrading your home theater system. It is a smart way to convert your big ticket purchase into a more budget friendly monthly installments.

Another benefit is its quick availability. In an emergency situation you can get loans processed in some cases within twenty-four hour. You avoid the tedious documentation, loan processing, time, and scrutiny over the purpose and repayment of loan, hence reducing the overall turnaround time.

It is a good option when you don’t want to get a collateralized loan or when you lack the option to do so.

The cons of personal loan

The interest rate on personal loan is usually higher compared to collateralized loans such as mortgages or home equity loans. As these loans don't require security, the banks, in order to offset the higher risk, charge a higher rate.

As these loans are quite risky, lenders provide personal loans only to borrowers with good credit rating. So if your credit rating is poor, chances of your application being rejected is quite high. Hence, the loan availability and pricing are subject to strict eligibility norms based on credit worthiness.

Summing it up

Personal loan may be useful in certain instances like medical emergencies however; it doesn't make sense if you are using it to fund your summer vacation. Managing your debt is important to develop a savings habit. After all, a rupee saved in interest expense is as good as a rupee earned.