A personal loan helps you to cover unexpected expenses, spread out large purchases over time or debt. However, it is not a suitable financing option for every situation. Look through its Pros and Cons to determine whether to take it or not:
Pros of personal loans :
● Few restrictions on loan purpose
Unlike other loans, which have specific uses, Personal loan is used for almost everything, you can make large purchases, pay off combined debts or fund a vacation or wedding.
● Spread out a large expense
If you want to do some repairs in your house, or do large expenses like a house renovation, it will help you to do it and pay back in smaller instalments.
● Consolidate high-interest debt
If you have high interest credit card or debt loans, you can combine it and pay a lower rate with a personal loan. The debt combination not only saves money, but also rolls all debts into one to simplify the payoff process.
● Predictable payments
This fixed annual percentage rate means the payment amount stays the same through and through. A predicted monthly payment is easier on budget than multiple one.
● Fast funding
You can easily get a loan within a week of applying, approval takes up to a day.
● No collateral required
These loans are usually unsecured means you don’t risk losing your property if you fail to pay back.
● Rates can be lower than credit cards
Personal loans have lower APRs than credit cards, especially if you have a higher income and credit score.
● On-time payments help build credit
It accounts for 35% of credit score and reputable lenders report payments to credit bureaus. On time payments benefit your score.
Cons of personal loans :
● Borrowers may need strong credit and income
Lenders check loan applicants, credit score and payment histories, proof of income, Debit to income ratios. The best rates go to borrowers with high credit scores, high incomes and little existing debt.
● Increase your debt load
A new loan raises your DTI, makes it difficult to raise future loans.
● Lenders may charge origination fees
Lenders charge origination fees on loan, this fee is an upfront fee to the loan account that covers the cost of processing loan.
● Rates may be higher than other financing options
It’s important to compare all options before getting a loan. Other options that are cheaper include 0% APR credit cards and home equity financing.
● Potentially high monthly payments
Depending on how much you borrow and length of repayment terms, loan payment can be higher than minimum payment of credit cards.
● Missed payments negatively impact credit
On time payments build your credit score while one miss payment can hurt it. Lenders report missed payments that are more than 30 days to the credit bureau.
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