Signing up for a personal loan? Here's what you need to know

A personal loan is one of the most expensive loans across categories. Since it is an unsecured loan, given to borrowers without any collateral, lenders charge a high rate of interest. Personal loan rates depend on the borrower’s financial history, credit score and the rates can go as high as 36%.

Taking a personal loan just to splurge or fulfil lifestyle or aspirational needs can turn out to be a financial blunder. Experts recommend that such loans should be taken only in case of emergencies when you do not have any other source of income.

So, before you sign-up, here’s some help to understand the costs involved in a personal loan:

1. Interest rates: Personal loans come with a very high rate of interest ranging from 6.9% to 36% depending on the borrower’s credit score and financial history. However, the interest rates on gold loans, property loans or auto loans are much less in comparison. So, the interest component you pay for your personal loan is huge.

2. Pre-payment charges: Many lenders do not have the pre-payment option on personal loans. While those who have charge you a pre-payment fee. The prepayment charges are usually some percentage of your outstanding amount. However, other loans do not have pre-payment charges.

3. Processing fees: Processing fee is very high for personal loans  in comparison with other types of loans.

4. Can increase debt: Many individuals take personal loans to clear their credit card bills. This clears the card bill but simultaneously creates the opportunity for more charges and financial stress ending leading to a higher debt if you are an overspender.

Conclusion: Suitability of a personal loans may very with an individual’s needs and financial habits. Taking a loan to meet discretionary expenses is not a financially wise decision and may lead to a debt trap.