Personal Loan: The Pros and Cons

While most people charge expenses to their credit cards, there may be a smarter way to borrow money: personal loans. Although not as popular as credit cards, they have a lower rate of interest, longer repayment terms, and fixed monthly payments. Here are the important pros and cons of personal loans.

Types of Personal Loans

Unsecured personal loans: Personal loans are usually unsecured. What this means is that the loan amount is not really backed by any collateral. Instead, the bank checks your credit score and financial history and then decides whether you are creditworthy. Compared to secured personal loans, these loans have a higher rate of interest.

Secured personal loans: With these loans, you offer the bank collateral for the loan amount. The collateral could be your savings account, car, or your home. If you are unable to repay the collateral, the bank may seize the collateral.

Pros of Personal Loans

1. They have multiple uses
2. You usually don’t have to submit a collateral
3. You can borrow any sum of money (up to $100,000 usually)
4. Interest rates are quite reasonable
5. You don’t need to have the best credit scores
6. You have a long-enough loan repayment term

Cons of Personal Loans

1. Payments are fixed, so you can’t vary the monthly payment
2. Can have a higher rate if you don’t have a good credit score
3. Apart from the interest, you may have to pay origination fees
4. You may have to pay prepayment penalties if you repay the loan before the completion of the loan term
5. There is a potential for scams

How to Get a Good Deal on A Personal Loan

If you want to ensure you get a good deal on your personal loan, it’s important that you shop around and compare different loans. Make sure to check if the lender is charging any hidden fees, how good the customer service is, and if there are any prepayment charges. Before you sign on the dotted line, work out your monthly budget again and determine whether you can afford the monthly payment. Once you receive the loan, make sure to pay the monthly amounts on time so your credit score doesn’t fall.