Personal loans are a versatile loan option as they can be used for a variety of purposes. However, they might not be the best option at all times given their risky nature. As such, borrowers are usually advised to only choose a personal loan in situations where they have no other option. To determine when a personal loan is a good idea, the following details covered in this article must be considered.
Advantages of a Personal Loan
Some of the key advantages of a personal loan include the following.
- Disbursed Lump Sum: Unlike other types of loans which are used for very specific purposes, a personal loan can be utilized in any manner by the borrower. As such, these are disbursed in one go, enabling the borrower to utilize funds immediately.
- Quick Approvals: A personal loan is typically processed and approved very quickly. This is a significant advantage for people who are trying to acquire it for an emergency. In fact, certain lenders can even approve the loan and disburse the amount within one day.
- No Collateral Needed: Usually a personal loan is an unsecured one. This means that the borrower does not necessarily need to put something else which the lender may keep in case of repayment default. Individuals with no assets that can be used as collateral can greatly benefit from this.
- Longer Term of Loans: A personal loan can be created with smaller monthly payments spread over a longer period of time. For instance, a personal loan is usually granted for a duration between 2-10 years, making it simpler for the borrower to complete the monthly payments.
Disadvantages of a Personal Loan
Personal loans come with their own set of disadvantages which may be very essential to consider. The following cons may deter a lot of people from availing a personal loan.
- Higher Interest Rates: Since these loans are mostly unsecured, the lender is at a greater risk of losing money. Because of this, they tend to offer the loans at a much higher interest rate. Moreover, private lenders can impose an even higher interest rate as compared to financial institutions like banks and credit unions.
- Higher Fees: For a personal loan, the overhead charges and fees like origination fees can be high as compared to other types of loans. This may result in a higher overall expenditure, making these a less appropriate choice. These can depend upon the loan amount, and thus it is essential for borrowers to get a realistic estimate to make sound decisions.
- Stricter Eligibility Requirements: A personal loan typically has much stricter policies for a customer to be eligible. The lenders pay close attention to the individual’s credit history, financial status, source of income, stability of employment, and more. Failing to meet any of the criteria in a satisfactory manner may lead the lender to refuse the loan application.
When to Choose a Personal Loan
Knowing when you should opt for a personal loan and when it is not the right choice will depend not only on having details about the loan, but also on assessment of your personal habits and tendencies. Some factors you must consider include the following.
- Loan Options: Before you choose a personal loan, do some research about other types of loans and financing options which you can use for your requirement. If there are alternatives which suit your need, it is advisable to choose one of those instead of a personal loan. However, if there is no other alternative, a personal loan becomes the obvious choice.
- Credit History: Your personal credit history will play a pivotal role in determining whether or not a personal loan is the right option for you. People with a good credit score, for example, are likely to secure more suitable loan terms including lower interest rates as well as more favorable repayment terms as compared to people with a poor credit score.
- Emergency Requirements: Personal loans are known as a helpful resource when searching for a source to get funds quickly. If you are stuck in an emergency situation, this may be a suitable option. For instance, if you need to quickly pay off an existing debt or pay medical expenses, a personal loan may be the right choice. However, it must be consciously determined whether the emergency is real or not.
When To Avoid a Personal Loan
In addition to identifying situations where you can avail a personal loan, it is also vital to know when a personal loan is not the right option for you. Consider the following factors:
- Bad Spending Habits: Individuals with poor spending habits should absolutely avoid taking personal loans as it can further hamper their credit score. This is because a personal loan can be utilized in any manner, and an individual without discipline regarding spending habits may end up wasting the money.
- Inability to Repay: If you are aware of the fact that you will face challenges with repayment, it is better to avoid taking a personal loan. This too will damage your credit score, which will in turn hamper any future creditworthiness. Depending upon the term of the loan, the monthly payments can be high or low. Before signing the contract, you must assess if the payment amounts are achievable.
- No Urgent Requirements: People who do not need to take care of any urgent business should avoid taking a personal loan. Rather, they should choose an alternative to it which will be more beneficial. This is because you can achieve more suitable repayment and interest terms for other forms of loans which will not impact your creditworthiness either or at least not as much.
Personal loans can be very helpful because of their versatility and processing times. However, they can also come with a higher risk than other types of loans which makes it essential to be careful when opting for one.
Also read: Select Personal Loan: Definition, Types, and How to Get OneÂ
Borrowers should weigh all their options before choosing a personal loan and only opt for it in case they have no other alternatives, such as in emergency cases, when they do not have collateral, or to pay off another debt.
