Taking out a personal loan can be an excellent way to afford purchases that you otherwise wouldn’t be able to. From building credit to consolidating debt, personal loans are an invaluable tool for your financial health. However, personal loans can be beneficial when you need help getting on top of big or unexpected expenses if you do not have the savings to fund them, but keep in mind they need to be paid back along with interest and fees.
A personal loan is money borrowed by an individual from a lending institution, like a credit union or bank. Personal loans are usually unsecured, meaning you don’t have to use collateral to secure funds. The lender grants the loan to the borrower based on their creditworthiness, which indicates how likely they are to pay the loan back.
Whatever you need it for, there are pros and cons to taking out a personal loan like all credit options and it is important to be aware of it and weigh up your options before committing.
The pros of personal loans include:
Settling the Cost of a Significant Purchase Safely
It allows you to take a large purchase such as a holiday, wedding, or buying a new car and spread the cost over a longer period. This makes it much more affordable and means you won’t compromise your existing personal finances to afford it.
Quick Funding
Depending on your lender, you could receive funds from your loan the same day you apply.
As long as you have all of your financial ducks in a row when you apply, you shouldn’t have to wait long to receive the money.
Improve Monthly Cash Flow
When you use a personal loan to consolidate debt, you are also able to improve your cash flow by switching from a high-interest rate to a much lower one with a personal loan. This frees up more cash each month for you to use for bills or other recurring costs.
No Collateral Requirement
Personal loans especially the unsecured ones don’t require collateral for you to get approved. This means you don’t have to put your car, home, or another asset up as a guarantee that you’ll repay the funds. If you’re unable to repay the loan based on the agreed-upon terms with your lender, you’ll face significant financial consequences. However, you don’t have to worry about losing a home or a car as a direct result.
The cons of personal loans include:
Long-Term Commitment
The biggest con to personal loans is that you have to make a long-term financial commitment.
Well, this could be fine if you have a stable income and predict you will still be earning the same amount or more in several years and this could be more difficult for those with fluctuating incomes, such as a freelancer or someone self-employed.
No 0% Interest Involved
Personal loans will always have added interest that will be calculated during your application and added on top of your monthly repayments, but this will never be at 0%, unlike other consumer credit products like credit cards. This is a disadvantage when comparing products as it might be preferable for you to go down the route of a credit card or finance deal that is fixed at 0%, as long as your credit score is good enough to make you eligible.
Personal Loans Increase Your Debt
Carefully consider if your reason for taking out a personal loan is worth the possible financial strain long term. Be mindful of overspending and taking on too much debt. When your debt becomes unmanageable, it can affect your ability to save money and pay other bills on time.
In conclusion, before taking out a personal loan try and make a plan for how you’ll use the funds and how you’ll repay them (with interest). Weigh the pros and cons of taking out a personal loan rather than using another financing option.
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