Personal loans typically come to mind when extra money is needed. It doesn’t matter what the need is, from planning a wedding to paying off hospital bills to even offset a high-interest loan, personals loans can cover it.
When used properly, a personal loan will help fill out that void in a budget without putting your assets at risk. Is it that easy?
There are so many types of loans that are available for anyone looking for extra cash. You can check here to learn more about the different types of loans. What advantage does a personal loan have over these other types of loans? Is it the right decision for you? Well, one way to answer these questions is to consider the advantages and disadvantages of a personal loan.
Knowing the advantages and disadvantages will not only help you make an informed decision but will also ensure you know what to expect before you get the loan. Before we get into all that, we will like to discuss the whole concept of personal loans to help you get a clear understanding of what we are talking about.
Personal Loan – What it is and how it Works
Personal loansare installment loans that offer the borrower a specific amount of cash ranging from about one thousand dollars to about fifty thousand dollars. The money is usually given in a lump.
They are often unsecured, which means you can obtain them without using collateral. The terms of the repayment depend on the source of the credit. However, it can range from 1 to 10 years.
One attractive thing about this credit type is that you can use the loaned money for practically anything. However, some lenders may decide to impose a restriction.
The interest rates are often fixed, so they won’t change while the credit is being repaid. The process of obtaining this loan can be likened to the process of getting credit cards. You will have to give some personal information, details concerning the desired loan, and some financial information.
After this is done, the lender will run some checks, this may reduce the credit score of the person applying for the loan temporarily. Once the lender finds the person qualified, (a score of about 600 is usually required) the terms of the loan will be fixed after which the credit will be given. You can visit https://www.xn--forbruksln-95a.no/ if you wish to know more about the workings of personal loans.
We believe you now have enough understanding about the process and workings of this financing. With that out of the way, let us now consider the benefits and downsides.
Personal Loans – Advantages
The following are some of the key advantages of a personal loan:
1. Easy to Manage
A major reason people take this loan is to merge their debts, like several credit cards accounts. However, unlike credit cards accounts, with this financing, they need just an account. This account can be easily managed when compared with the alternative of managing different credit cards that have several payment dates, interest rates, and several other variables.
Therefore, personal loanshelp those who qualify for them to streamline their payments while also saving some money since their interest rates are mostly cheaper than that of credit cards accounts.
2. Collateral isn’t needed
As we have stated already, personal loans are mostly unsecured, so you do not need collateral to obtain them. Simply put, you do not need to offer any asset like your car or your home as an assurance that you will pay back the money borrowed.
However, this does not mean you will go free if you do not repay your debt. There are some financial consequences that you will face if you fail to pay back on the due date.
3. High Borrowing Limits and Low-Interest Rates
When placed in comparison with credit cards, the interest rates of personal loans are quite lower. As of early 2021, the typical rate was about 11.84%, while the typical credit cards rate was about 16.04%.
So, if your credit history is good, you can save about 5 to 6 % by obtaining a personal loan.
4. They are Flexible and Versatile
Some loans specify what they can be used for. That is to say, the loan has to be used to achieve a particular purpose, like a car loan, this can only be used to buy a car.
But this restriction is nonexistent with personal loans. You can choose to do anything you want with the borrowed money, from paying hospital bills to consolidating debts to even buying a wedding ring. The choice is yours, so it can fill the void in any budget.
This is the best alternative if you want extra money that you will not be restricted on its usage. However, you may need to check with the lender for the loan’s approved uses before you apply for it.
Personal Loans – Disadvantages
Below are the major disadvantages of personal loans:
1. Can Increase a Person’s Debt
As we already said, you can consolidate your debts with this loan. However, if you are someone that overspends, this may just be an avenue to indulge your spending habit.
When you clear your credit card with this loan, you may be tempted to incur more debts with the free credit cards.
2. Higher Payments
While personal loansinterest rates are lower than that of credit cards, the monthly payments are higher. This means you will have to pay back your debts in bigger chunks than if you used credit cards.
Also, the debt has to be paid back in due time based on the agreed payment time frame. So, if your reason for taking the finance is to consolidate your debts, you need to make adjustments for your payment rate and duration. If you do not, you may end up defaulting on the loan’s terms.
3. High Penalties and Fees
Sometimes, the loan may have penalties and fees that can rise to the borrowing cost. The fees are usually used to cover the processing of the loans and may either be removed from the money borrowed or rolled in the monthly payments.
Sometimes, if you fail to balance off the debt after the agreed time frame, some lenders may add additional money as penalties.
Therefore, you have to make sure you properly read through and understand the loan terms before you take it.
4. Alternatives may Have Better Interest Rates
As we have said earlier, there are other types of financing, and they may have a cheaper interest rate when compared with personal loans. For instance, home equity loans have lower interest rates. But most people do not go for this because it requires using the home as collateral.
At the end of the day, whether you take the loan or not should be based on your needs. If you are a high-spender, you may want to rethink the whole idea. But, if quick money is needed to fill a budget void this may be the perfect choice for you. Whatever you decide on, ensure you weigh the pros and cons properly so that you do not end up regretting your decision.
A personal loan is a nice option when you need extra money. Knowing the advantages and disadvantages will ensure you choose wisely.