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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