Advantages:
The Handbook of Loan Syndications and Trading
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• Interest rates: Banks that offer loans do so at competitive rates of interest and on mutually understood and accepted repayment terms, as compared to unconventional lenders.
• Easy availability: Considering that lending institutions like banks must always keep their depositors’ money working for them and earning more money and interest than it pays out to depositors, bank loans should, in theory, always be available to anyone seeking one.
• Good lending terms and relations with the bank: If a borrower meets the bank’s lending criteria to the letter, he could benefit with a lower rate of interest and relaxed and easy repayment terms. Add to this the bonus of having a good working relationship with the bank.
• Speed: If the borrower has all the appropriate documentation, any bank can process his application within an hour.
• Uses: A borrower can use a bank loan for a number of reasons—either for setting up a business, or to buy home improvement goods or to go on a holiday. In fact, a bank loan is a financial package which helps you tide over a difficult time or set up business or invest in stocks. Considering it is a loan, it means that eventually you will have to pay the bank back within a stipulated time at a predetermined rate of interest.
• No need for collateral: For a personal loan, a borrower needn’t produce any security or collateral. Besides, even the documentation is very little, as compared to other kinds of loans, thereby expediting the processing time.
• No need to specify use of the money: In case of a personal loan, one need not spell out what the money is going towards. All a borrower should do is to repay the money in equated monthly installments on or before the stipulated date.
Disadvantages:
• Borrowers over-borrow: People sometimes over borrow money and get caught in their own debt. Often, this can lead to a shortfall in cash flow and payments can take precedence over income. To prevent this, loan repayments are restricted to a set percentage of a borrower’s income.
• Prepayment penalty: Often, loans come with a prepayment penalty which prevents the borrower from paying the loan earlier than the stipulated date without incurring any extra costs.
• Restrictions: Banks levy a number of restrictions on the transaction. This includes having a good credit history before applying for a loan, and there are often restrictions about how the money should be used.
Finally, the pros of taking a bank loan far outweigh the cons. It’s best for an investment since it offers a hedge against any financial problem as a result of which you find you cannot pay back the bank. But if you have a solid investment, you can easily pay back your loan.
By Mithi Chinoy
