Personal loans are the most convenient way to borrow money. As they do not require any size of collateral, borrowers do not have to bear too much risk. Personal loans can be fruitful to finance significant expenses; however, you cannot use them for business expenses.
At the time of signing off on a personal loan, a lender will run an affordability check, and it includes your credit report. As the standard personal loans carry larger sums, you are expected to have a good credit rating. If your credit score is not up to scratch, personal loans for bad credit with guaranteed approval will be available at higher interest rates.
Loans are expensive whether you borrow just a paltry sum or a large sum. While borrowing money, you should carefully take stock of your current financial situation. A lender will evaluate your repaying capacity, but you cannot just bank on them. Remember that they are humans, and to err is human. The ultimate goal of a lender is to make profits out of your financial situation, which can be quite risky for you.
Regardless of your situation, you will have to take the bad with the good. Each loan has drawbacks that you will need to understand so you do not rue the day down the line.
Here are the upsides of personal loans:
- It helps you build and do up your credit score
If you do not have a credit history, personal loans can be fruitful. As you will pay down the debt in instalments over time, your lender will report your payments to credit reference agencies. Adhere to a payment plan. Likewise, personal loans can help improve your credit score. The previous damage cannot drop off your credit file, but on-time payments next time will help clear your image.
- The cost can be spread over time
With the help of personal loans, you can buy a large item without worrying about breaking the bank. The repayment term will be a few months, so it allows spreading the cost of the item you purchase. You can easily make payments without struggling with other expenses.
- Personal loans help consolidate debts
It can be too challenging to keep up with payments when you have multiple debts to pay off on different due dates. Chances are you slip through the cracks. You can take out a personal loan worth the total value of your current debts and use them to pay off once and for all. Now, you will have only a personal loan that you can clear over a few months. These loans bring a sense of relaxation.
- They provide flexible interest rates and payment deals
Personal loan rates may vary between 9.45% and 35.49%. The interest rates you are charged depend on multiple factors such as financial condition and credit score. It is likely that you get the same amount of loan at a higher interest rate than your friend despite the same credit score.
This is because your financial condition might not be as sound as your friend’s. The payment term will also vary. This flexibility prevents you from falling into debt.
Here are the downsides of personal loans:
- Accrue higher interest rates
Even if your credit score is excellent, you can be charged higher interest rates. The amount of the loan is immense, and the nature of the loan is unsecured, so the risk of default is very high, and your lender does not have any way to get their money back except to chase you.
You will be perceived as a borrower with a high default risk if you have owed loans for bad credit with instant approval at the time of taking out a personal loan so high interest rates will be charged.
- Come with fees and penalties
In case you miss a payment, late payment fees will be charged to your account. Interest will accrue for until a period of the next due date. There are various types of fees. Origination fees are a one-off cost that you will pay in the beginning, but there are additional fees you are supposed to pay down every month along with the instalment of the debt.
- Result in debt
Just because personal loans are available at the most competitive interest rates, it does not mean that there is no risk of being tied to unnecessary debt at all. As you do not have to meet a lot of conditions, you can be flexible with the borrowing amount. Taking on more debt than necessary will cost you a lot of money in interest, which can pay off the debt on time.
- Credit damage
A lender is not bound to report credit reference agencies of your on-time payments. It means you will not see any improvement in your credit score if your lender does not report to them.
This scenario generally applies when you borrow money with a smaller repayment length. Still, when you make a default or miss any payment, the lender must report this to credit bureaus.
Missed payments will show up on your credit file for up to two years, and defaults will remain for up to six years. The damaging effects could last longer.
The bottom line
Personal loans will be the right choice for you when you borrow money based on your needs. Taking out extra funds will cause problems for you down the track. They are aimed at funding significant personal expenses such as buying equipment, cars and gadgets, weddings, vacations and the like.
Every loan will have merits and demerits. You have to weigh them up before you take out a loan. Assess your repaying capacity and then decide whether you can actually repay the debt so you do not fall behind on payments.
For over 5 years, Alex Thomas has been working as a noteworthy content writer at Zeolitefunds. After graduating in Economics, he started working in the finance sector. His interest in loans has encouraged him to explore extensively. His write-ups in the form of blogs and articles have shown his exceptional knowledge. Alex’s work is a product of his hard-core research and writing expertise.