Personal loans are often touted as a quick and convenient way to address immediate financial needs, but they come with significant drawbacks that can impact your financial health over time. If you’re considering borrowing money, it’s worth exploring why personal loans might not be the best choice and how a loan against mutual funds with Neoble can offer a more advantageous solution. In this blog, we’ll cover:
- Comparing Loans Against Mutual Funds (LAMF) with Personal Loans
- Why People Fall for Personal Loans
- How Marketers Allure Gullible Borrowers into Personal Loans
- The Growth of Personal Loans in India
- RBI’s Apprehension of Personal Loans
a. Comparing Loans Against Mutual Funds (LAMF) with Personal Loans
1. Interest Rates
Personal loans typically come with high interest rates. According to the Forbes data analysis from RBI’s data, the average annual percentage rate (APR) on personal loans in India ranges from 9.27% to 24%. For example, if you take out a personal loan of ₹1,00,000 at an 18% APR for 2 years, you’ll end up paying approximately ₹1,22,400 in total. This results in ₹22,400 purely in interest.
In contrast, loans against mutual funds (LAMF) with Neoble usually offer much lower interest rates, ranging from 10% to 15%. If you borrow ₹1,00,000 against your mutual funds at a 12% interest rate for 2 years, your total repayment amount would be around ₹1,12,000. This represents a significant saving in interest compared to personal loans.
2. Fees
Personal loans often come with processing fees ranging from 1% to 3% of the loan amount, along with additional charges like prepayment penalties and late fees. For a ₹1,00,000 loan, this could mean an extra ₹1,000 to ₹3,000 in fees.
Loans against mutual funds with Neoble generally have minimal or no processing fees, making them a more cost-effective borrowing option.
3. Impact on Credit Score
Personal loans can impact your credit score negatively, especially if you miss payments or carry high balances. In contrast, loans against mutual funds do not affect your credit score as long as you make timely repayments. Always check your credit score to understand where you stand by parameters set by leading financial institutions.
| Comparison | Personal Loan | LAMF |
| Loan Size, Rs Lac | Limit According To Age & Salary | No Limit |
| Interest Rate (%) | 11.45% onwards | 10.5% |
| Monthly Obligation | EMI | Interest Only |
| Principal Repayment | Part of EMI | Can be postponed to the maturity. |
| Time to Process | 1 Day | 8 minutes |
| CIBIL Score | Required | Not Required |
| Prepayment Charges | 1% onwards | NIL |
| Foreclosure Charges | 3% onwards | NIL |
b. Why People Fall for Personal Loans
1. Quick and Easy Access
Personal loans offer quick and easy access to funds, often with minimal documentation and fast approval processes. This convenience can be tempting, especially when faced with urgent financial needs.
2. Marketing and Promotion
Aggressive marketing campaigns and advertisements often highlight the ease of obtaining personal loans and downplay the long-term costs. This can lead people to overlook the higher interest rates and fees involved.
3. Perception of Flexibility
Personal loans are perceived as flexible because they can be used for a variety of purposes, from medical expenses to vacations. This versatility makes them an attractive option for those who need immediate cash.
c. How Marketers Allure Gullible Borrowers into Personal Loans
1. Flashy Advertisements
Marketers often use flashy advertisements that emphasize quick approval and minimal paperwork while glossing over the high interest rates and fees. Terms like “instant cash” and “no collateral required” are designed to create a sense of urgency and convenience.
2. Low-Initial Rates
Some lenders offer low introductory interest rates to attract borrowers, only to increase the rates significantly after the initial period. This tactic can lead borrowers to underestimate the true cost of the loan.
3. Emotional Appeal
Personal loan advertisements often appeal to emotions by portraying them as a solution to immediate needs, such as funding a child’s education or covering medical emergencies, without highlighting the financial strain of high interest rates.
d. The Growth of Personal Loans in India
Personal loans in India have seen significant growth in recent years. According to a report by the RBI, personal loans have grown at an annual rate of approximately 15% over the past five years. In 2023, personal loans accounted for around ₹23 lakh crore of the total credit market in India, reflecting the growing reliance on this form of borrowing.
This growth is fueled by increasing consumer spending, higher disposable incomes, and a greater willingness to take on debt. However, the rising volume of personal loans also raises concerns about the potential for increased financial strain on borrowers.
e. RBI’s Apprehension on Personal Loans
The Reserve Bank of India has expressed concerns about the rapid growth of personal loans and the associated risks. According to RBI’s Financial Stability Report’s conclusion, there is a growing risk of over-indebtedness among borrowers due to aggressive lending practices.
The RBI has cautioned lenders to ensure responsible lending practices and to assess borrowers’ creditworthiness more rigorously. They emphasize the importance of transparency in loan terms and the need to protect consumers from predatory lending practices.
Conclusion
While personal loans might offer a quick solution for immediate financial needs, their high interest rates, additional fees, and potential impact on your credit score can make them a costly choice in the long run. On the other hand, a loan against mutual funds with Neoble provides a more cost-effective and transparent option, with lower interest rates, minimal fees, and no impact on your credit score.
If you’re looking for a smarter financial solution, explore our loan against mutual funds service at Neoble. Benefit from lower interest rates and manage your cash flow effectively without the drawbacks of personal loans.
Ready to make a wise financial decision? Apply for a loan against your mutual funds with Neoble today!
By choosing a loan against mutual funds with Neoble, you’re opting for a financial solution that supports your well-being and helps you navigate your financial needs more efficiently.
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