Personal Loans – Important Factors to Consider
Understanding the pros and cons of personal loans is a crucial step toward financial literacy. It is all the more important if you are currently looking for a lender and deciding on getting a loan.
Personal loans are greatly helpful in many situations. Undoubtedly, they have a lot of benefits. However, they do come with significant strings attached if you are not careful.
But even with all the risks attached, if you use the money carefully, the advantages of loans outweigh the disadvantages. This is especially true if you qualify for a loan that comes with a very low-interest rate.
Whatever your circumstances may be, we will look at the full picture of personal loans in this article to help you make the best decision.
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How Do Personal Loans Work?
A personal loan is an installment loan. It provides the borrower with a sum of money that they need to repay over some time. The borrower also must keep by the terms and conditions of the loan agreement.
If you want a personal loan, you have to submit an application and request a certain amount of money. When the lender approves your application, you will receive the money within hours. Typically, you receive the money in the form of a checking account deposit.
Borrowers receive all the money in one go when it comes to personal loans. They are then free to use it however they like. No matter how you spend the money, though, you have to return it within the allotted time.
The Pros and Cons of Personal Loans
Advantages of Personal Loans
1) Competitive Interest Rates
One of the biggest pros of personal loans is that they come with competitive rates. On average, a personal loan has an interest rate of 9.41%. This is much lower than the average rate of a credit card which is almost 14.6%.
If you have a high credit score, you may even get a better rate.
In addition to that, many lenders offer you a choice. You can choose between variable and fixed interest rates.
A fixed interest rate means that the amount you pay monthly will be the same throughout the loan’s lifetime. On the other hand, a variable rate means that your payable amount can fall or rise depending on the lender’s benchmark rate.
2) High Borrowing Limits
From the pros and cons of personal loans, one pro is the high borrowing limit.
Personal loans are highly flexible. Aside from having lower rates of interest, a personal loan also has a higher borrowing limit compared to other sources, such as credit cards. This means that you can use a personal loan to fund large projects and even start your own business.
High borrowing limits, however, are mostly offered to people with a good credit score and income.
3) Fast Access to Cash
With a personal loan, you get fast access to cash. Once a lender approves your application, you receive the money electronically within a few hours.
Sometimes, lenders may give out the loan in the form of a physical check. This can take a few days for the check to arrive in the mail.
4) High Flexibility
Some loans can only be used for a specific purpose. For example, if you take out a car loan, the only thing you can do is use those funds to buy a vehicle.
However, personal loans can be used for any purpose. Still, you should check with your lender to make sure that you know what you can use the money on. Do this before you apply for the loan.
In most cases, though, you can use personal loans for virtually any reason.
5) No Collateral Requirement
Unsecured personal loans do not require any collateral.
This means you don’t have to put your home, car, or any other asset up as a guarantee that you will repay your loan. So, you don’t have to worry about losing your home, car, or any other big asset if you happen to not pay the loan on time.
Disadvantages of Personal Loans
1) Increased Debt
Often, personal loans are a way to consolidate debt. But sometimes, it can cause you to go deeper into debt if you don’t address your underlying bad spending habits.
A personal loan may clear your other debts but it won’t address the root cause of debt for you. That is something that you will have to do on your own by spending thoughtfully and creating a financial plan.
2) Higher Fees
In addition to the interest rates, personal loans also have other fees. And, these additional fees can be quite high. Such fees include a loan origination fee. This can range anywhere from 1% to 8% of the loan amount.
Also, some lenders charge an application fee whether or not you get approved for a loan.
3) Penalties can Be High
As advantageous as personal loans are, sometimes they can carry high penalties if you don’t follow the agreement terms. These penalties could be late fees for late monthly payments.
Sometimes, lenders also charge a prepayment penalty to borrowers who pay off their loans early.
4) Higher Monthly Payments Than Credit Cards
While interest rates for personal loans are lower, the monthly repayment amounts can be higher. This is because personal loans have to be repaid by the end of a certain timeline. Credit cards, on the other hand, are constantly evolving.
As such, it is important that you know how much you can repay monthly before you apply for a loan.
Conclusion – The Pros and Cons of Personal Loans
To sum it up, knowing the pros and cons of personal loans is a vital piece of information that everyone should know. Applying for a loan is a huge financial responsibility and commitment.
Therefore, make sure you know how to handle it before you dip your toes in!
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