A personal loan is a form of installment loan that provides you with a fixed amount of money in one lump sum, typically anywhere from $1,000 to $50,000. Personal loans are usually unsecured, which means that you do not have to use collateral to secure money, and the terms of repayment can be from one to 10 years.
Personal loans may be used for almost anything, although limits on their use can be imposed by individual lenders. Interest rates on personal loans are also fixed, so while you repay the loan, the interest rate won’t change.
It is close to requesting a credit card to apply for a personal loan. Your personal information, your financial information, and the specifics of your preferred loan will be needed. The lender will have to run a hard credit check before approving you, which could temporarily lower your credit score.
If the lender is sufficient for your financial picture and credit score, sometimes you need a credit score in the mid-600s, the lender will set your interest rate, loan amount, and terms.
All at once, you can obtain personal loan funds and start immediately paying them back. Your monthly payment will be the same amount every month because personal loan interest rates are fixed: a portion of your principal plus interest charges. Per month, you can make these fixed monthly payments before your loan is paid off.
Some of the pros and cons of personal loans can be found below.
Advantages of Personal Loans
1. Fast Approval
You can also apply (or pre-qualify) for a personal loan online, with the increasing number of online lenders, and obtain a response the very next day. You might be able to visit and get the same treatment from your local bank or credit union, especially if you have an existing relationship with the bank.
It’s really easy to get personal loans. In certain cases, you can get a loan even within 24 hours. So, if you are looking for emergency money, your best bet is personal loans.
3. Enough time to Pay Back
Another big issue with payday loans is that you only get to pay them off in full for a few weeks. This can’t be done by many cash-strapped borrowers, and then they end up rolling over the loan or taking out another one right away. Personal loans give you at least a year to pay off the debt, breaking it down into monthly installments that are much smaller and more manageable.
4. No Collateral or Security Needed
To obtain this loan, there is no need for security and the tenure of the loan is much shorter compared to a home loan or car loan. Comparatively, this has less downside for the borrower, and if you are unable to repay the loan, the security is forfeited in the case of most loans. Your assets are secure, as personal loans do not need any security. This makes this type of loan appealing to those who do not own assets such as vehicles, houses, stocks, etc.
5. Help with Debt Consolidation
When you have several lenders to pay every month, debt can become overwhelming. In addition, you may have some loans that are significantly more costly than others. Using it to pay off credit card debt or merge other accounts by wrapping all of your unpaid debt into one loan is one of the main benefits of a personal loan. This means one payment per month, and, depending on your target, it can also mean savings or lower payments.
6. Minimum Documentation
Normally, as opposed to a home loan or car loan, personal loans don’t require much paperwork. The processing time is also faster.
A personal loan is multi-purpose. They can be used for different kinds of purposes, ranging from travel expenses, medical expenses, buying the latest expensive jewelry to electronic gizmos, or even upgrades to the house/car.
8. Reasonable Rates
Personal loans are also cheaper than borrowing a credit card. According to this article from Credit Karma, interest rates for this sort of loan can be as low as 5 percent APR for a borrower with a decent credit score. By comparison, credit cards, even for the most creditworthy consumers typically charge at least 13 percent APR.
Disadvantages of Personal Loans
1. High Interest Rates
Since most personal loans are unsecured, a higher risk is taken by the lender. The cost of lending is directly linked to the lender’s risk. Your interest rate may be higher as personal loans come under this umbrella, and therefore, your total cost may be higher.
There are more accessible ways of borrowing, but the particular financial needs you are trying to cover might not be addressed by such means. And if your overall credit is not strong, the cost of a personal loan may be much higher.
2. Fixed Rates
Fixed monthly payments are perfect for budgeting, but if you’re used to smaller monthly payments and lengthy pay off periods, such as with credit cards, they can be a hassle. Bear in mind that if you’re late on your loan with a payment or default, your credit will suffer.
3. Fees and Charges
The charges that lenders charge is one downside to several personal loans. Some lenders charge a loan origination fee or loan processing fee, or if you pay off your loan before the end of the term, they tack on a prepayment penalty. It can really add up to fees and fines, so be sure to consult with your lender beforehand to see if fees are negotiable.
4. Strict Eligibility Criteria
When it comes to eligibility requirements for personal loans, lenders pursue strict guidelines. Before accepting an application, most banks and NBFCs focus on a certain income level. In addition to the revenue, the applicant’s credit score is also under review, with the option of refusing the application on the basis of a poor/average score.
5. Affects Your Credit Score
It’s going to influence your credit score every time you add debt to your financial profile. During the approval process, personal loans raise the amount of debt you have, lower the age of your credit accounts, launch a hard investigation, and register as a newly opened debt account. Your credit score will have either a short-term or negative influence because of all these things.
While there is no real way to prevent this and it’s just one of the intangible borrowing costs, if you have another forthcoming financial change on the horizon, it could be a big problem. For instance, if you are looking to buy a house or a new car soon, taking out a personal loan could reduce your chances of approval for that loan or increase the rate on the purchase you get paid. This may be a serious personal loan drawback in these circumstances.
6. Repayment Rigidity
Although borrowers have flexibility in terms of selecting the repayment date, once it is selected, most lenders do not allow adjustments in this. This implies that the loan will not be prepaid or opted for part-payment, effectively having to pay the amount required for the entire duration. Failure to repay the EMIs on time could also draw legal action, resulting in difficulties.