Benefits and Downsides of Personal Loans: Loan Shopping 101
Personal Loan Benefits and Downsides Explained
When you need money fast or for an emergency situation, a personal loan might be a good option. Circumstances dictate if a loan is the best idea for you. You need to consider the purpose and amount of the loan when deciding on a personal loan. You can use a personal loan for many things, such as debt consolidation, or an emergency expense. Understanding the benefits and downsides of personal loans is pertinent when shopping for this type of loan.
There are many benefits and downsides of personal loans. You should weigh them all before choosing to get a personal loan. If you decide to get a personal loan, be sure that you do some personal loan shopping. You want to make sure you get the right loan for you.
Benefits of Personal Loans
While there are many benefits and downsides of personal loans, depending on your situation, the benefits may outweigh the negatives. With a personal loan, you know you are borrowing a set amount of money. You know how much money you pay back each month because the payment terms are set. There are no surprises.
Most personal loans are unsecured, which means you do not have to have collateral. There are some types of personal loans that you can use collateral. After understanding your needs and the pros and cons of personal installment loans, you can make the right choice. Here are the benefits of personal loans spelled out in detail.
1. Convenient and efficient
When looking at the benefits and downsides of personal loans, the faster you receive your money is a key factor. You can apply for a personal loan online. You can apply for the loan from the comfort of your own home. Typically, online lenders approve loans within one to two days. There are websites that help you do some personal loan shopping.
You enter some information and the website gives you potential lenders to meet your needs. This cuts down the time you spending looking for the right loan for you. Online lenders can give you a pre approval. This is a soft hit to your credit. It informs you of how much you can borrow and the time you have to repay. This saves you time when you actually apply for the loan.
2. Lower interest rate than most credit cards
Typically, personal loans have a lower interest rate than many credit cards. When balancing the benefits and downsides of personal loans, you should look at the interest rates. Interest rates on credit cards can be well over 18 percent. Every time you don’t pay the balance in full on your credit card, you are hit with an interest charge.
You have the potential of additional interest charges every month if you don’t pay the balance in full. A credit card costs you much more than a personal loan. Personal loans have set payment amount for a set period of time. A credit card allows you to pay only the minimum which never gets you closer to paying it off.
3. Often used to Consolidate Debt
People often get themselves into trouble with credit cards. Many do not understand how they work and only pay the minimum payment. Paying only the minimum gets you deep into debt quickly. It is important that you understand how credit card companies apply interest to the amount you spend. When you do not pay the balance in full, the credit card company applies interest.
If you find yourself way over your head in debt, debt consolidation might be the answer. When considering the benefits and downsides of personal loans, look at your existing debt to determine if you need to consolidate it. At some point, credit card debt gets out of control. In those cases, it may take over 10 to 15 years to pay off the debt. You can usually pay off a personal loan for debt consolidation within five years.
4. Improve your Credit Score
Believe it or not, obtaining a loan can improve your credit score. That is something to considerwhen looking at the benefits and downsides of personal loans. However, there are some key points to keep in mind. You must may your payments on time and regularly. Loan lenders send information to credit bureaus. Late and missed payments go against your credit and cause your score to go down.
If you make payments on time, your credit score can go up. Good credit provides many lending opportunities to you. Lenders are more willing to let you borrow money. You get lower interest rates and higher amounts you can borrow. Borrowing money to pay off your debts typically gives you more cash each month. You can use this money to purchase items with cash so you don’t have to use your credit card. It puts you in a better financial position.
5. Fixed Payment and Interest Rates
I find the most difficult thing with credit card payments is that they are changeable depending on how much you use it. While they provide flexibility to use the credit instead cash, there is a price to pay. The balance jumps up quickly and if you can’t pay it off at one time, you can get into a bind.
When determining the benefits and downsides of personal loans, consider the benefit of a fixed payment amount. This amount is stable and won’t change from month to month. You are able to budget in a fixed amount to your monthly debits.
You know how long you are paying that amount also. Those are all known at the time you sign the loan documents. The interest rate of your loan does not change like some credit cards. Often, credit cards offer special introductory rates that go up after a set amount of time. This does not happen with a personal loan. Your interest rate is set.
VIDEO: Benefits of Personal Loans
Downsides of Personal Loans
It isn’t always sunshine and roses with personal loans. There can be downsides of personal loans when it comes to borrowing money from a lending source or a bank. Look at the benefits and downsides of personal loans. You must consider your credit score. You also should be aware of any fees or pre payment penalties. A personal loan may seem like a good idea initially.
Remember, you do have to pay it back. You have to make monthly payments. If you don’t make payments on time, or you don’t make them at all, the bank will get their money. Lenders do not like it when you default, or don’t pay, on your loan. They call and harass you to get their money. They may use a collection company to get payment. You do not want to get yourself in this position.
1. Fees and Can carry a Pre-payment Penalty
Personal loans always have fees. Sometimes they are built into the amount of money you borrow, so you don’t see them. Sometimes they are built in to other places. It is important to know what types of fees your lender has in place.
When weighing the options of the benefits and downsides of personal loans, be sure to look at the fees. Most all lenders have a late payment fee. If you are even one day late with your payment, there could be a fee. Find out ahead of time what that fee is.
Some lenders may charge you a fee if you pay more than the set amount each month. It is often a good idea to pay a little more than they actual loan payment per month. This is a good way to pay off the loan faster. Be aware, some lender charge a fee if you pay more than the set amount. They may also charge a fee if you try to pay off the loan early.
Lenders are hoping to make a certain amount of money off you. If you pay the loan early, they may not get that amount, so they charge a fee. Be sure to find out if there are any fees for late payments, or for early pay off.
2. Low Income and Bad Credit Can Increase Rates
When determining the benefits and downsides of personal loans, you must take your credit into account. If you have bad credit, it may be difficult to obtain a loan with a reasonable rate of interest. When you have less than perfect credit, you may be able to secure a loan, but don’t be surprised if it comes with high interest. If you miss one payment, your credit score goes down.
If you are behind by multiple payments, your credit score drops drastically. When you have poor credit, an online loan may be right for you. There are some pros and cons cash loans online in which you should be aware. There may be additional fees or interest associated with an online loan if you have bad credit.
3. You Might Use the Personal Loan on Bad Debt
Some of the benefits and downsides of personal loans has to do with your own habits. When you obtain a personal loan, there is a chance you could use it and create bad debt. You may not consider it to be bad debt, but you should think about it before you spend money you get from a loan.
If you don’t have money in your savings, or extra money to spend on a vacation, you may be enticed to get a personal loan. Loans for travel come with fees and high interest rates.
This could cause a repayment amount that you can’t afford. Those with good credit may get 10 percent interest. Those with poor credit will find a much higher interest rate. Getting a loan to pay rent is bad debt when you aren’t able to repay the loan.
Any debt that puts you in a worse place financially is bad debt. Consider the repayment terms when getting a loan. Being able to repay the loan is as important and qualifying for the loan.
Things to Know Before Getting a Personal Loan
There are benefits and downsides of personal loans and you should know them all before signing the documents. There are some things you should take into consideration. Your credit score does matter. Loan terms are generally better with a higher credit score. Your income makes a difference. The higher your income, the more you are able to borrow.
Lenders want to ensure you can repay the loan. Your income shows them you can. You should know what types of loans are available to you before you decide on one lender. Different lenders can offer you various lending terms, including interest rates and length of repayment.
There are many pros and cons to obtaining a personal loan. Loans are great for consolidating debt. You can take high interest debt, like credit card debt. You can take debt that you may not be able to pay back because of the high interest or payments. Consolidating several debts into one payment allows you to focus on just one payment. Typically, this payment is less than what you were paying before getting a personal loan to consolidate debt.
It can be a quick way to get the money you need, especially if you apply for a loan online. There are some negatives to keep in mind, also. The loan might come with a high interest rate or fees. Some lenders charge a fee if you pay off the loan early. The loan may come with heavy fees for late payments. Be sure to read all the fine print and know what fees the lender charges.
Personal Loans for Bad Credit
You can get a loan if you have bad credit. There are benefits and downsides of personal loans if you have bad credit. You may have to find someone to co sign for a loan if you credit is bad enough. There are lenders willing to loan to someone with bad credit, but it may come with a high interest rate. You can look around for the best loan for you. An online loan might be the best one for you. There are tools online to help you find all the loan options available to you.
There might be some short term loans available to you, but pay attention to the terms. It may come with a high interest rate, or a short repayment schedule. You may have to repay the loan in full. If you accept a loan like this, be sure you repay the loan. You don’t want to get yourself into a worse situation. If you obtain a loan, it can improve your credit. Every payment you make on time improves your credit rating.
Does a Personal Loan fit into your budget?
When considering a personal loan, you should make sure you can afford to repay the loan. You must make sure the payment fits into your budget. There are benefits and downsides of personal loans including the repayment plan. There are many budget calculators available online to help you determine if you can afford the payment. When considering your budget, you should account for all expenses.
You can’t leave out anything when accounting for all of your expenses. An online calculator separates expenses into categories to help you create your list. Be sure to make note of all expenses including ones that may not occur every month, including car maintenance.
Interested in a personal loan?
There are many ways to get a personal loan. You can get a loan from a bank, or other financial lender like a credit union. This type of loan may take several days. Loans are available through online lenders. Those funds could be available the next day. No matter how you obtain the loan be sure you understand the benefits and downsides of personal loans. Read the fine print and understand all the potential fees.
A personal loan could be exactly what you need to help consolidate your debts and payoff high interest credit cards. Personal loans are only beneficial if they improve your financial outlook. If they put you in a worse place as you try to repay the loan, then it might not be the right thing for you. You should be sure to understand the benefits and downsides of personal loans before you sign the paper work.
Certain loans come with high interest and tight repayment schedules. Some loans might have to be paid back all at once. Some loans might have high fees, or an early payoff fee. You should make sure you know what all the terms of the loan are before agreeing to them.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.