Is Opting for a Personal Loan Better Than Borrowing From Friends & Family?

A personal loan is an unsecured loan that does not require any collateral and can be availed with minimum documentation. It is an easy way to get funds to take care of various personal and financial needs and can be repaid according to the terms and conditions of the lender. Since a personal loan does not require any security, the banks and Non-Banking Financial Companies (NBFCs) only check your credit score, credit history, and income and analyse your repayment capacity while approving or rejecting your personal loan application. The rate of interest on a personal loan depends upon your repayment capacity and is generally higher compared to secured loans. It typically starts at 12% p.a. and can go up to as much as 28% p.a. Unlike many other loans, there is no end-use restriction on the funds availed through a personal loan. It can be used for your child's education or wedding, purchasing a vehicle, home renovation, purchasing a smartphone, medical emergency, vacation, clearing off other loans, or any other purpose.

Here are the 6 benefits of opting for a Personal Loan than borrowing from friends and family:

1. Clear Loan Terms:

When you borrow from a bank or NBFC, there is a legal agreement between the lender and you. The loan agreement consists of all the terms related to loan sanction and repayment. So, if one party is at fault, the other party can take legal action against them. Since you know you are bound to pay the monthly instalment on a specific due date, you take all the precautions to ensure you do not default on it.

However, when you borrow money from your close ones, there is no legal contract between you two, making the loan terms and conditions vague. If you lack financial discipline, there are chances that you delay the promised repayment date.

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2. Convenient Loan Tenure:

Borrowing from friends or family lacks loan terms but generally, the money is expected to be returned at the earliest. It can create pressure and awkwardness for you during family get-togethers and meet-ups until you repay the entire amount.

A Personal Loan comes with a maximum tenure of 5 years. In exceptional cases, some banks can even extend it up to 7 years. It gives you sufficient time to repay your loan and since the loan tenure is long, your EMI becomes affordable.

3. Affordable Interest Rates:

Your friends and family might not ask for the interest on the amount they offer to you. But, nowadays, the competition has increased as many banks and NBFCs are offering Personal Loans. Hence, with proper research and comparing different lenders, you can avail of a Personal Loan at an attractive interest rate.

4. Does Not Affect Relationships:

Borrowing money from your close ones can strain your relationship with them. Moreover, meeting them at family functions or get-togethers can create awkwardness, especially if you are unable to repay the money on a promised date. Since most people do not make any agreement when borrowing from their friends or family, there could be misunderstandings in assuming the loan terms, which can affect their relationship. Not being able to timely repay the dues can even lead to disputes that make your relationships bitter.

In the case of a personal loan from a financial institution, the delay in loan repayment will result in late payment fees charged by the lender and have no impact on your relationships. However, if you have opted for a loan with the help of a guarantor, it can affect your relationship with them.

5. Option to Opt for a Personal Loan Top-up:

After you timely pay a certain number of EMIs, the lender can offer you a top-up loan on your existing loan. This amount can be helpful when you are already paying high EMIs and do not qualify for a new loan but need money urgently. The top-up loans can be availed at attractive interest rates and do not require much documentation as it is offered based on your repayment history.

However, if you have borrowed money from your closed ones, it would not be appropriate to borrow more money until you repay the existing dues.

6. Pure Business Deal:

Taking a personal loan from a bank or NBFC is a pure business deal that is legally bound to both parties. Hence, there is no obligation or any kind of awkwardness that can destroy your relationships. Since it is a legal agreement, both the parties are liable to perform their duties as per the loan agreement, which avoids any conflict of interest.

To Conclude:

Taking a personal loan from a reputed financial institution is a far better option than borrowing money from friends and family. If you are in urgent need of funds, you can take advantage of the pre-approved personal loans offered by various banks and NBFCs at an attractive interest rate. It can be availed of with minimum documentation and once applied, the loan amount can be credited to your bank account within 10 minutes to 24 hours, depending on the lender. In absence of the pre-approved offer, you can apply for a personal loan (regular), which can get disbursed in 24 hours to 7 days, depending on the lender's loan approval process. Before opting for a loan, it is advisable to do thorough research, choose the lender wisely, and read the loan agreement carefully to avoid any future disappointments.

Warm Regards,
Ketki Jadhav
Content Writer