The Pros and Cons of Personal Loans

When you’re strapped for cash there are a few options available to you; you can either use a credit card, or seek out a loan. Personal loans are relatively small loans that enable people to borrow money to use at their discretion. These loans generally have higher interest rates than longer term loans (like mortgages) but lower interest rates than a credit card. Additionally, the repayment terms of the loan can be structured so that the loan is paid back over several years, giving more flexibility than a credit card. Before considering any type of loan, though, it’s important to first look at the positive and negative aspects of this method of financing before making a decision.

Pros

1. Easy to Secure

Personal loans are often easy to obtain. Generally, if you have good credit and a steady income, you’ll have no problem qualifying for a loan. Having bad credit can affect your ability to secure a personal loan, but it’s not a deal breaker. There are two main types of personal loans, secured and unsecured. Secured loans require some form of your personal property as collateral (such as a car, boat, land or your home) that you’ll lose to the lender if you default. Unsecured loans don’t require any collateral, but they do have higher interest rates to offset their risk.

2. Rapid Approval Time

The approval time for these loans is quick, so often you’ll know within a day or two whether you’ve qualified or not. The required documentation is much less than if you were applying for a larger loan, like a mortgage, which makes the review and approval processing time much faster. The process is also sped up due to the fact that the amounts borrowed are less than long-term loans.

3. Flexible and Mulitpurpose

Once you’re approved and receive the funds, you can use them for anything you choose. The use of these funds is left entirely to your discretion. Unlike a car loan or mortgage, the lender won’t ask questions as to what the money is for; all they want to know is that you’re good to pay it back.

4. Relatively Low Interest Rates

When compared to credit cards, personal loans generally have lower interest rates so they’re better to use than a cash advance. If you get a personal loan with an interest rate lower than your credit cards, it’s an easy way to consolidate your credit card debt into one easy monthly payment, while lowering the overall interest paid. This benefits you twofold – you can pay off your credit cards and save money on interest. The monthly payment also tends to be lower, making it easier to pay each month.

5. Great for Credit Score

Personal loans can be an excellent way to build good credit, as long as no payments are missed. Similar to a credit card, lenders want to know you can make payments on your loan every month. By paying your loan on time, you establish a relationship that can help boost your credit score and improve or maintain your reputation as a trustworthy borrower. Be aware, however, that the opposite is also true. If you start making late payment or missing payments altogether, it can wreak havoc on your credit score.

Cons

1. Strict Clearance Policies

Depending on which lender you choose, the qualifying criteria can be strict. You’ll need to have a steady income, proof of employment, as well as information on your current debt. The credit qualifications will also vary greatly between lenders. Although there are loans for those with poor credit ratings, you will often have to come up with collateral and you’ll pay a higher interest rate.

2. Difficult to Obtain if Poor Credit Rating

Applican’ts with a poor credit rating will be classified as high risk and therefore will be charged a higher annual percentage rate (APR). The higher APR means higher monthly payments, which could make it easier to default on the loan, resulting in a decrease in the borrower’s already low credit score. Alternatively, an applican’t may only qualify for a secured personal loan. In that scenario, the borrower will need to come up with some form of collateral that they then risk losing.

3. Risk of Borrowing Too Much

As personal loans tend to be short term, there are limits to loan amounts. Usually these loans only go up to $25,000, however, very few people are eligible to borrow that amount. A typical borrower will end up receiving somewhere between $5,000 and $10,000. It’s best to figure out how much you actually need before deciding on a loan. Avoid the temptation of borrowing more, even if you qualify. Unnecessary debt will result in more interest owed and a higher chance of default.

4. Fixed Loan Term

The length of the loan is generally no longer than seven years. Some companies will allow repayments to spread out over ten years, while others may only permit five. While this can seem like a large amount of time to pay off a relatively small amount of money, it is important to remember that making timely payments is crucial. If you can afford to pay extra or pay the loan off early, do so. You’ll save money on interest and help your credit score.

5. Hidden Fees

Arrangement fees, early repayment costs, insurance, and penalties for late or missed payments can start to add up. Take all fees into account when figuring out the cost of your personal loan. Choose lenders with lower fees and be aware of what you’ll pay if you miss a payment. Even small late penalties can add up if you habitually miss your monthly payments.

Personal loans can be a good option for short-term financing. These loans generally have lower interest rates than a credit card and can be used to boost your credit score. However, you need to be aware you will always pay back much more than you borrow. If you agree to a loan over a certain period creditors will want you to stick to that repayment method so they get optimum return on their lending. By researching lenders and weighing the pros and cons, you can ensure you’re getting the best option for your personal loan.

Featured Personal Loans

Personal Loan	Details	Min Interest Rate	Min Comparison Rate	Min Loan Amount	Min Loan Terms	Apply Fee
ME Bank Personal Loan	A low rate personal loan from ME Bank with no application fee for a limited time.	13.59%	13.81%	$5000	1 year	$0
Aussie Personal Loan	A smart way to consolidate your bills to save time and money so you can pay for your holiday, a wedding or renovate the house.	13.90%	14.84%	$3000	1 year	$199
Sugar Money Personal Loan	Fixed rate personal loan with flexible options to get you funds when you need it.	13.99%	15.00%	$3000	2 years	$250
bankmecu Personal Loan	A convenient and fast way to purchase a car or debt consolidation with affordable rates and fees.	13.49%	14.55%	$1000	1 year	$150

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