Do you want to get a personal loan?
Right now, the American household debt is at $14.6 trillion. With so many people taking out a loan, more lending institutions rose to meet the demand. You can even get personal loans for bad credit, making it easier to get approvals.
The number of available choices has some drawbacks, however. Mitigate the risk by learning about the pros and cons of a personal loan. Without prior experience, you might not be knowledgeable of these considerations.
Fortunately, our guide can help. Read on as we discuss the benefits and drawbacks of getting a loan:
Pros of a Personal Loan
When you get fast personal loans, you gain an edge over other types of loans. Here are some benefits of using this financing choice:
Flexibility and Versatility
The majority of other loan types are only available for specific purposes. For example, when you avail of a car loan, you can only use the funds to buy a vehicle. Meanwhile, you can use personal loans for other reasons, like paying medical bills or consolidating debt.
When you are looking to finance a big purchase, a personal loan is a good way. After all, you need not lock yourself in how you use the funds. Ask your lender for a list of approved loan uses before you apply.
Lower Interest Rate and Higher Borrowing Limits
Personal loans often have lower interest rates compared to credit cards. The average interest rate for personal loans is 12%. Meanwhile, credit cards are at 19.5%.
When you have an excellent credit history, you can qualify for even lower loan rates. The range can be anywhere between 6% and 8%. Depending on your credit score, you are also eligible for a higher loan amount than credit cards.
No Collateral Requirements
When you opt for unsecured personal loans, you need not give collateral to get approval. It means not putting your vehicle, house, or other assets as a guarantee.
However, if you cannot repay the loan within the allotted terms, you will suffer severe financial consequences. Even so, you need not worry about losing your house or car as a result.
Another reason people prefer taking out personal loans is for debt consolidation. It is more manageable to pay a single personal loan instead of multiple credit card accounts. With this loan, you have a fixed-rate monthly payment instead of debts with various interest rates.
Taking a personal loan to consolidate debt also means having the same payment due dates. You also do not need to worry about other factors and variables.
When you qualify for a personal loan, you will often have a lower interest rate than credit cards. It enables you to streamline your monthly dues and save money in the long run.
Cons of a Personal Loan
Most people will benefit from the pros above. However, taking a personal loan is not the right choice at all times. Here are some drawbacks of taking out a personal loan:
Some Alternatives have Lower Interest Rates
Personal loans do not always have the lowest interest rates. It applies more when you have poor credit. When your credit history is less-than-stellar, your interest rates are lower when using a credit card.
Does your home have enough equity? If so, consider using a home equity loan or HELOC to borrow against it. The former uses an installment, while the latter functions like a credit card.
A downside to both loans is your home is the collateral. When you default on the loan, you will lose your home due to foreclosure.
Credit card balance transfer is another better alternative to personal loans. Use a good balance transfer offer to save more money. However, you must pay off your balance before the offer period concludes.
Expensive Fees and Penalties
Some personal lines have fees and penalties, driving up the cost of borrowing. Origination costs for these loans can range from 1% to 6% of the amount borrowed.
Your lender can roll these fees or subtract them from your disbursed amounts. It also covers the loan processing expenses.
Other lenders will charge prepayment penalties when you pay off your balance before your loan term ends. When you are considering a personal loan, review every fee and penalty before agreeing.
Higher Payments than Credit Cards
In general, credit cards have smaller minimum monthly payments. They also have no deadline for paying your entire balance.
Meanwhile, personal loans need higher fixed payments. You must also adhere to the loan term, paying off everything before it ends.
When you consolidate your credit card debt into a single personal loan, prepare to adjust to higher monthly payments. You also risk defaulting because of the fixed payoff duration.
Potentially Increase Debt
As said above, personal loans are valuable tools for consolidating debt. However, they will never address the core cause of the debt. When paying your credit cards using a personal loan, you will free up your credit limit.
When you are an overspender, it is tempting to use these cards once again. You will rack up more debt instead of freeing yourself.
Do You Need a Personal Loan?
When you need quick cash, personal loans are a great option. A lot of lenders can send funds within a couple of days. It is more prevalent when the lending institution operates online.
The fast money release allows you to pay off emergency expenses. For example, unexpected incidents like car crashes are more manageable when your loan can come through within a day.
You will also enjoy lower interest rates when you have a good credit score. Regardless, it is a form of debt. A bad financial habit is all it takes to keep you buried in debt forever.
Learn the Pros and Cons of a Personal Loan Today
These are the pros and cons of a personal loan. Use these considerations before filing your personal loan application. That way, you will never get into more financial trouble in the long run.
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