Getting a personal loan can be beneficial. But it requires you to consider multiple factors that are going to influence your finances for the next couple of years. You must gain a good grasp of all the factors before making a decision in this regard.
In our blog, we have described the major benefits and demerits of personal loans to help you gain knowledge before making any decision. We have also provided some tips that you should take into account while applying for the loan.
Pros of Personal Loans
One lump sum
Personal loans provide you with a large sum of money at once, which can be utilised to make versatile purchases. There are no limits on what you can use your loan money for. This gives you an opportunity to use this sum anywhere you want. This makes it easier to make big purchases without any prior savings.
Fast funding times
Personal loans have a fast procedure and short turnaround time, and you will receive your loan money within a very short time. This particular benefit of personal loans makes it suitable for emergency situations. Some banks may even transfer the money to your account in the next business. So, a personal loan can be helpful for any unforeseen auto repairs or travel needs.
No collateral requirement
Most personal loans do not require you to pledge any of your assets as collateral, which eliminates the risk of losing your valuable assets like your car or house if you cannot pay the loan. However, opting for an unsecured loan can result in higher interest rates and extremely strict eligibility criteria, which can make it difficult to qualify. Moreover, if you fail to pay your loan in time, it may result in severe credit and financial consequences.
Competitive interest rates
Personal loans offer extremely low interest rates as compared to credit cards. This makes the personal loan a viable opportunity to avail of in times of need. Furthermore, if you are borrowing a large sum of money and you have a good credit history, these interest rates may fall even lower for you, which will save you a lot of money in the long term.
Flexible Terms
While other loans limit you on how to use your money, like buying a car or paying your medical bills, personal loans allow you to use the money for various purposes, which makes it a suitable option to go for, especially if you want to spend your money on more that one purchase. However, it will be better if you check with your lender on how you intend to use the money.
Extended Payback Term
Personal loans can have a long payback term, which can range from 2 to 10 years, depending on the lender. This extended term can positively influence many aspects of the loan, including monthly payments and managing your payback. However, you must keep in mind that although extended terms make it more affordable for you, you will have to pay more interest over time to pay your loan back.
Fixed Instalments
Personal loans are divided into equal instalments over the total span of loan repayment. This gives you a fixed amount that you have to pay every month as an instalment. Knowing that you have to pay a fixed amount to your bank makes it extremely easy to manage your finances.
Cons of Personal Loans
High Interest Rates
Although personal loans offer a lower interest rate as compared to credit cards, the interest rate is usually higher than other alternatives, which makes you pay more in terms of interest over the loan term. Furthermore, if you have a poor credit history, the interest rate may even go higher for you than normal.
Strict eligibility Criterion
Since personal loans do not require any collateral, the lenders follow an extremely strict eligibility criterion to select the borrowers. These terms and conditions make it difficult for you to qualify for the loan. Moreover, if you have a poor credit history and do not have collateral for the loan, you may not have enough lenders that are willing to lend you money.
High Penalties and Fees
Many lenders charge the borrowers with an additional application fee to cover the charges of processing your application. Moreover, they may also charge you with heavy penalties if you fail to pay your instalments in time. So, it is better to look out for these terms and conditions before applying for a personal loan.
Higher Monthly payments
Where credit cards come with a small monthly payment with no limit on when you can pay the money to free up your credit limit, personal loans have comparatively very high monthly payments which can make it difficult to manage it over the years. Moreover, personal loans come with penalties that you have to pay if you fail to pay your monthly instalments on time.
Credit Damage
Just like your positive payments are reported to the authorities by lenders, they also report your negative payments. So, if you fail to cope with monthly instalments, this can result in severe damage to your credit score, which can hamper your future loans.
Things to look for before choosing a personal loan
- Compare interest rates of different lenders based on your credit score and opt for the lowest available interest rate.
- Define your needs to decide how much money you need to cover your expenses. We recommend you not to borrow more than necessary.
- Compare the interest rates and terms and conditions of different lenders and select a plan that suits your budget and financial conditions.
- Make sure to read and select the best payback term for your loan. If you extend your term too much, you will have to pay more money in terms of interest.
