Are you conflicted about applying for a personal loan? Borrowing money can drum up complicated feelings, especially when you don’t want to dig yourself into a deeper financial hole. There are times, though, when applying for a personal loan is reasonable. It’s important to note that personal loans should be used for things you really need rather than what you really want. Here are the pros and cons of personal loans. This should help you decide if the loan is worth it or not.
Personal Loan Pros
Consolidate Debt
If you have accrued credit card debt from different lenders, using a personal loan to consolidate your debt is a good idea. To do this successfully, be sure the personal loan lender you use has an interest rate lower than the interest rate your credit card company charges. Use your personal loan to pay the credit card debt on time, to avoid the interest rate charge. Because the interest rate is lower on the personal loan, you will save some money on interest rate.
Flexible Spending
Personal loans are called personal because the expenditure is at the discretion of the borrower. You will have to tell the lender what you intend to use the money for, but they will most likely approve of your personal reasons. Here are some good reasons you may want to use a personal loan for.[1] Flexible spending can be helpful because you can use it for whatever you need such as home improvement, certifications, pay for a wedding, etc.
Personal Loan Cons
Possible Early Repayment Penalty
Lenders want to make money, and they make money off interest rates. That’s why there’s such a thing as early repayment penalties. Even though lenders do still make money if you pay early, they won’t make as much. They make up for that loss through this penalty. Not all lenders have this fee so be sure to check each lender if this is important to you.
Low Credit, Stricter Terms
Personal loans are often unsecured loans. This type of loan is lent out without a collateral. A collateral is an asset the borrower can offer up as a security for the lender. For example, if the borrower fails to pay the loan, the lender can seize the asset in place of the payment. Now, if you have good credit, then your interest rate may be lower. But, if you have bad credit then your interest rate will be higher. Bad credit plus unsecured loans are a high risk for banks, therefore the terms will be more strict.
The pros and cons of personal loans require you to think about your options before you apply. Read through the fine print for things such as penalties and fees. If the loan has an early repayment penalty, calculate the life-time interest that you would pay to determine if the penalty is worth it. When it comes to penalties and interest rates, spend some time researching potential lenders. Personal loans can be beneficial if you put the time in up front weighing the pros and cons.
Link to article submitted in February titled “Good Reasons for Personal Loans”