When you are not doing too well financially, you might need an extra boost to get back on top. This is where a personal loan could be really useful. However, before taking one out, it is important to be aware of the big pros and cons that come with personal loans.
What are Personal Loans?
First, let’s start off by identifying what a personal loan is. A personal loan is an amount of money that you take out from a bank, credit union, private lender, online lender, or any number of other sources. Borrowers pay the loan back either in fixed monthly payments (usually in the space of two to five years) or in a single large payment. Most personal loans are unsecured, though there are a handful of them that are not.
Pros of Personal Loans
Personal loans can offer you a number of useful advantages when you are in a not-so-optimal financial situation. Some of the pros of getting a personal loan include the following:
You Can Use Them for So Many Different Things.
Unlike an auto loan, mortgage, or student loan, personal loans have a lot more freedom. A personal loan can be used for just about anything you want. Buy groceries! Consolidate debt! There are a lot of choices.
Many Do Not Require Collateral.
If you are getting a personal loan that is unsecured, you do not have to provide your lender with collateral.
You Can Borrow Many Different Amounts.
You can borrow varying amounts of money, depending on what kind of personal loan you are taking out. Some loans like payday loans are for a few hundred dollars, whereas others can go as high as $100,000. Depending on how great your financial need is, there is more than likely a personal loan out there that can fulfill it.
You Can Find Good Rates.
If you need a loan that is cheaper than credit card borrowing, a personal loan could be right up your alley. Though some personal loans do not require you to have a good credit score, some lenders will reward with an APR as low as 5% for having good credit. This is preferable to the 13% APR average that comes with credit cards.
Good Credit is Often Not Required.
You do not always have to have good credit when you want to get a personal loan. Some lenders may not perform any sort of credit check when you apply for a loan through them. This can be incredibly useful for anyone facing a situation where their credit is not in the best of shape, but they still need the extra leg up financially to make it through.
Lenders Could Offer You Plenty of Time to Repay What You Owe.
Many different kinds of personal loans will offer you plenty of time to pay back what you owe. Most lenders understand that you may not be able to come up with the repayment money in one go. The repayment schedule for payday loans is broken down into manageable monthly payments that last anywhere from two to five years.
Cons of Personal Loans
There are many pros to getting a personal loan, but there are a few cons that you need to keep in mind. These include:
Payments are Often Fixed.
When you take out a personal loan, you will more than likely pay a fixed amount every month that you absolutely must meet on time. If payments are not made on time, this can end up causing some serious negative repercussions that neither you nor the lender want to deal with.
Some Loans Have Higher Rates Than Others.
Depending on what kind of personal loan you are taking out, you could end up having to pay more in interest if your credit is not exactly in the best condition.
You Have to Pay Origination Fees: Cons of Personal Loans
Several personal loans come with an origination fee in addition to the interest rate that you already must pay. This is charged in order to cover the cost of processing your loan. The fee is usually between 1% to 6% of what you borrow. You have to pay this amount in its entirety upfront when you initially take out the loan.
Many Give You Penalties for Prepayment: Cons of Personal Loans
Though many kinds of personal loans do not charge you any prepayment penalties, there are still many that will. Many people attempt to avoid paying interest by paying back their loan quicker than they need to. This causes the lender to lose money because they lose profit from lending the money. In response to this, many lenders will charge prepayment fees so that they still make money off of the loan.
