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November 5th , 2024

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IS IT WORTH IT? THE PROS AND CONS OF PERSONAL LOANS

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Introduction
Personal loans are fairly enticing when you require some more cash for consolidation of a current loan, urgently required money, or for a substantial purchase. That being the case however personal loans like any other financial instrument have its merits and demerits. The advantages and disadvantages of personal loans are reviewed in this post to assist you in making the proper decision for you.

1. What is a Personal Loan?
A personal loan is an example of an installment loan, which can be applied for, and utilized in, numerous situations such as consolidating other debts, or for home renovations. While mortgages, auto loans, etc are collateralized, personal loans most of the time are non-collateralized loans. However, the lenders consider your credit worth or ability to pay before defining the loan eligibility and its conditions.


2. Pros of Personal Loans

  • Flexible Use: Once granted, personal loans are flexible, enabling individuals to meet as many needs as one may want to cater for.
  • Fixed Interest Rates: Appropriate for homeowner’s personal loans have fixed interest rates, therefore the monthly installments remain constant to the date the loan is paid back.
  • Predictable Payments: Regarding the payment frequency, since it has a fixed amount to be paid every month; Personal loans’ payment plan is easy to plan.
  • No Collateral Required: Compared to other loan products, personal loans aren’t secured, therefore, you don’t stand losing any property in case of default.


3. Cons of Personal Loans

  • Interest Rates Can Be High: Personal loan interest rates are normally much higher than other types of systems of credit especially, for the borrowers with low credit scores compared to home equity loans.
  • Fees and Penalties: Some personal loans have fixed costs such as, origination fees charged when you borrow the loan, late fees, and prepayment penalties.
  • Potential for Debt Cycle: When done carelessly, a personal loan results in additional borrowings if one cannot afford to meet his/her obligation and ends up taking more credit than he/she can handle.
  • Impact on Credit Score: Personal loans entail a credit check, and this will pull down your credit score for some time despite the minimal impact it has on your credit score. Also still, failure to make the payment can be counterproductive since it deteriorates your credit score.


4. When a Personal Loan May Be Worth It
Personal loans are however advantageous at certain conditions:

  • Debt Consolidation: When you have a number of purchases made through credit cards which attracts a higher interest than applicable for a personal loan, you are better off taking a personal loan to clear the credit card debt more cheaply.
  • Emergency Expenses: As for urgent, unscheduled expenses, a personal loan is often cheaper than credit cards if only you manage to score a good rate due to a good credit score.
  • Major Life Events or Home Improvements: Often people use personal loans when they need to pay a considerable sum of money at once, for example, to pay for a wedding or renovating a house.


5. Alternatives to Personal Loans
If a personal loan will not fit you well, you can consider other products:

  • Credit Card Balance Transfer: Debt consolidation can also be achieved with the help of 0% introductory APR of some credit cards, which might be cheaper if one, is to repay the money before the introductory period ends.
  • Home Equity Loan or Line of Credit: With homeowner applying for home equity, the interest rates may be slightly lower but note that your house will be used as security.
  • Credit Union Loans: Personal loans by credit unions are comparatively cheaper vis-à-vis other banks charges and fees in terms of their lending.


Conclusion
I personally believe that a personal loan is a great financial product that, however, does not always meet all the needs you might have. If you weigh the advantages and disadvantages of robot advisors and investigate the conditions set by other financial managers, then you can make justified choice of a financial model that will be suitable for you. Always borrow with caution and as you are doing so, make sure that any given loan is affordable.

 

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Daniel Aryeetey

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