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Personal Loans Pros and Cons: Top Things to Consider

Personal loans are undoubtedly beneficial and could help someone financially as long as it is used the right way. However, it could be a burden for some — a tool that would bury them deeper into debt instead of helping them out of a tight financial spot. 

What is a personal loan?

A personal loan is an installment loan that gives you a fixed amount that you can borrow. This usually ranges from $1,000 to $50,000 or even $100,000, depending on several factors. Most personal loans also do not need collateral. This means you don’t have to put something up as security to ensure you pay back the loan. Some lending institutions also allow you to take out more than one personal loan as long as you meet their requirements. 

Before taking one out, however, you must consider personal loans’ pros and cons. Many unique loan pros could sway you into taking one out. But there are also several drawbacks to taking out a personal loan that you might want to consider first. 

Personal loan pros

Flexibility

Personal loans can be used for various things. Unlike home loans and car loans, you can use personal loans for whatever financial reason. For example, you can take out a personal loan to fund your dream vacation. Or you can take a more practical approach and use your personal loan proceeds to do some minor home repairs or even to pay off multiple debts that are higher in interest. You can even use it to pay off your bills. Whatever financial lack you find yourself having, a personal loan can help you. 

Lower interest rates

Your interest rate does not change throughout the life of the loan. And depending on your credit score, personal loan interests are generally lower. Credit card interest, on average, is around 16-17%. Personal loans have an average interest rate of about 10-11%. If you have a good enough credit score, your interest would most likely be around the 10% range. The higher your credit score, the lower your interest rate. 

Lump sum

You get your loan in one large sum. This means you can pay for those repairs without staggering your payments. Or you can take that lump sum and consolidate your debt. And since you get it in one lump sum, you pay the same monthly amount. This makes it easier to fit paying the loan back into your monthly budget. 

Faster funding

Most personal loans have a next-day or same-day payout. This means that once your loan is approved, you can get your funds within the day of approval or the day after. So, if you apply for a personal loan due to an immediate need, you get quick access to funds. However, you still need to consider the time it takes for the entire application process to be completed. 

Build credit score

Taking out a personal loan can help you build your credit score. As long as you pay your loan on time every month, your credit score will increase, making it easier for you to transact with financial institutions in the future. 

Personal loan cons

Higher interest rates

We’ve talked about getting lower interest rates on personal loans as one of the unique loan pros. However, interest rates are still dependent on your credit standing. If you have a low credit score, you might get a higher interest rate than someone with a better credit score. Your rate depends on how good of a payer you are and the risk a lender takes in letting you borrow money that might not be paid off. Your credit score will give them insight into whether or not you are a consistently good payer. 

Credit damage

Personal loans can both help you build credit and destroy your credit score. But, again, this depends on how good you are at paying your debt off. This means you must consider whether you can realistically afford the monthly payments on top of your regular bills. Missing payments and defaulting on a loan can devastate your creditworthiness. 

Processing fees and penalties

Processing personal loans can come with fees that are taken from your total loan amount. Unsecured loans, such as private loans, can have higher processing fees than secured ones since the lender is taking a more significant risk by providing you with an unsecured loan. That means that if you take out a $10,000 loan, the money you get after the whole process will be lower than what you expect. Also, if you miss payments or are a habitual late payer, lenders might charge you a penalty fee on top of your monthly payments. 

Final Thoughts

You need to consider many things before taking out a personal loan. The biggest of which is whether or not you can afford the monthly repayments. Personal loans are a great help but can also cause credit damage if you are not careful and mindful of paying the loans back. 

In making this important decision, it is best to seek expert advice. Our lending team can definitely assist. Contact us today, and we’ll help you decide if a personal loan is right for you.