If you need extra money to cover the costs of home renovations, financing, debt consolidation, etc., you may want to consider taking out a personal loan. Prudent use of unsecured loans can fill the risk budget gap for homes or other assets. The APR on a loan depends on your credit history and income, which is not always suitable for everyone. Before applying for a loan, weigh the advantages and disadvantages of personal loans.
Personal loan: what is it?
A personal loan is a one-time loan that provides the borrower with a fixed amount. These loans are usually unsecured, which means that you do not need to provide collateral or guarantors to ensure the lender that you will return you debt. The term can range from 24 months to 60 months or even longer. Personal loans can be used for almost any purpose, however, loan companies may limit their use. The interest rate on personal loans is fixed, so yours will not change during repayment.
Applying for a loan is similar to applying for a credit card. You will be asked to submit some basic personal data and loan details.
Pros and cons of personal loans
Choosing this type of loan has both advantages and disadvantages. Consider the following factors when making your decision.
Pros of personal loans:
- Flexibility and versatility. Certain types of loans can only be taken and spent for specified purposes. For example, if you want to take out a student loan, you can only use those funds to pay for college or things related to your study. Personal loans can be used for a variety of purposes, such as home improvement, car repairs, treatment, vacation, education, or paying for a rented apartments. If you are looking to finance a big deal but don’t want to cling to money, then a personal loan may be a good choice. Before applying, please contact your lender to clarify the loan rates and terms;
- Lower interest rates and higher credit limits. The interest rate on personal loans is usually lower than on credit cards. Personal loan interest rates currently range from about 3% to 36%. Consumers with a good credit history are eligible for individual loans ranging from 6% to 8%. You can also get a loan amount above the credit card limit;
- There is no mortgage. Unsecured personal loans do not require collateral approval. This means you don’t need to rent a car, house, or other property to guarantee a return. If you are unable to repay the loan on the terms agreed with the lender, you will have to deal with bad financial consequences. However, there is no need to worry about completely losing your home or car.
Cons of personal loans:
- Interest rates can be higher than other interest rates. The interest rate on such loans is not always the cheapest, especially if you have a bad credit history, who can pay higher interest rates than credit cards;
- Fees and fines can be high. Personal loans can include fees and penalties that add to the cost of the loan. Some take a commission from 1% to 6% of the amount issued;
- If you pay off the balance before the loan expires, some lenders will charge a down payment penalty. Please review all fees and penalties for any individual loan you are considering before applying.
Before signing a loan agreement, think carefully how you will return the funds (plus interest). Weigh the pros and cons of getting personal loans without using other funding methods.