Are you in need of money to solve a variety of purposes like planning for a dream wedding, paying consolidated debt, and lots more? Then, a personal loan is the right option for you, but there are so many pros and cons that come with getting a personal loan which you need to know before going for it.
Fortunately, we will be looking at the pros and cons of personal loans to know if it is the right financing option for you — and consider alternatives. Endeavor to read this article to the end to retrieve all the information you need to know.
What is a Personal Loan?
A personal loan is an amount of money you can borrow to use for a variety of purposes. Personal loans can be used to consolidate debt, pay for home renovations, or plan a dream wedding. See the Difference Between Business Loan And a Personal Loan.
Personal loans can be offered by banks, credit unions, or online lenders. The money you borrow must be repaid over a specific period of time with interest. Some lenders may also charge fees for personal loans.
Types of Personal Loans
Personal loans may be secured or unsecured.
- A secured personal loan is one that requires some type of collateral as a condition of borrowing. This means you will have to put your home, car or other expensive assets to guarantee that you will pay the funds.
- An unsecured personal loan is a type that requires no collateral to borrow money. This means you don’t have to put your car, home or another asset up as a guarantee that you’ll repay the funds.
Banks, credit unions, and online lenders can offer both secured and unsecured personal loans to qualified borrowers.
Banks generally consider the unsecured loan to be riskier than secured because there is no collateral to collect. That can mean paying a higher interest rate for a personal loan.
As with any other form of debt, there are Pros and cons to be aware of before applying for a personal loan. See What You Need For A Personal Loan
Here are the Pros and Cons of Personal Loans
Pros for Personal Loans
- One lump sum
- Fast funding times
- No collateral requirement
- Lower interest rates
- Flexibility and versatility
- Extended loan terms
- Easier to manage
One lump sum
Since you can get the loan payment all at once, it can be easier to make a large purchase, consolidate debt or otherwise use the loan all at once. In addition, you will get a fixed interest rate and predictable monthly payment, making the loan easier to manage.
Fast funding times
Personal loans generally have fast approval times and payment times, making them useful for emergencies or other situations where you need money quickly. Some personal loan lenders can deposit the loan proceeds to your bank account as soon as the next business day.
Lower interest rates
Personal loans often come with lower interest rates than credit cards. As of July 2023, the average personal loan rate was 11.27%, while the average credit card rate was 20.50%.
Consumers with excellent credit history can be eligible for personal loan rates of around 10.3% to 12.5%. You may also be eligible for a higher loan amount than the limit on your credit cards.
Flexibility and versatility
Some loans can only be used for a certain purpose. For instance, purchasing a vehicle is the only way to use the funds if you take out a car loan. Personal loans can be used for many purposes, from consolidating debt to paying medical bills.
Extended loan terms
Unlike short-term loans like payday loans and others that charge high interest rates, personal loans range from 2-10 years, depending on the lender. Consequently, you’ll get a reasonable monthly payment and ample time to repay what you borrow.
Cons of personal loans
- Interest rates can be higher than alternatives
- More eligibility requirements
- Fees and penalties can be high
- Additional monthly payment
- Increased debt load
- Higher payments than credit cards
- Potential credit damage
Interest rates can be higher than alternatives
Interest rates for personal loans are not always the lowest option. This is especially true for borrowers with poor credit, who might pay higher interest rates than credit cards or a secured loan requiring collateral.
More eligibility requirements
Personal loans can have more strict requirements than other types of funding options. Whether you have poor credit or a short financial history, fewer lenders will be available to you.
In addition, some lenders don’t permit co-signers, which can be used to strengthen your approval odds if you have minimal credit history or your credit score is low.
Fees and penalties can be high
Personal loans may come with fees and penalties that can drive up the cost of borrowing. Some loans come with origination fees of 1% to 6% of the loan amount.
The fees, which cover loan processing, can either be rolled into the loan or subtracted from the amount disbursed to the borrower.
Some lenders charge prepayment penalties if you pay the balance off before the end of your loan term. Before applying, review all fees and penalties of any personal loans you are considering.
Additional monthly payment
With a personal loan, you add another monthly payment. If you are not careful, a personal loan can lead to loan term issues with your budget if it’s not accounted for when you take out the loan, and making the monthly payment causes you to overdraw your account and send your budget into the red.
Increased debt load
Personal loans can be a tool for consolidating debt such as credit card balances, but they do not address the cause of the debt.
Paying your credit cards off with a personal loan frees up your available credit limit. This allows overspenders to rack up more charges rather than free themselves from debt.
We believe that you were able to read the article to this point and you have been able to determine if getting a personal loan will be the right choice for you or not. For more information on this article, you can contact us via the comment box.