Pros and Cons of Personal Loans
Today, you can use a personal loan for just about anything. Consolidating debt like credit cards or student loans, paying off medical bills, and growing a business are a few common uses of the funds. Before getting a personal loan, it's important to understand the pros and cons of personal loans. Read on to find out if this is the best option for you!
Pros of Personal Loans
Personal loans offer a range of benefits you might not see in other loan types. Below are a few advantages to consider:
Consolidate Debt
Using a personal loan to consolidate debt is one of the top reasons to take out a personal loan.
Instead of having to keep up with five payments to different lenders each month, you only have one payment to one lender.
This could make budgeting and managing your money much easier. However, make sure you don't take on more debt if you do decide to go this route. By consolidating your debts into one payment, it then becomes easy to pay every month on time and in full!
Build Credit
Making timely payments on a personal loan is a great way to gradually establish and build your credit history, or even repair bad credit. Your lender will automatically report your payments to the main credit reporting agencies and they use the data to create a credit score.
Using a personal loan for debt consolidation can also build your credit. If you use a personal loan to pay off credit card debt, then keep the credit account open, you will significantly increase your available credit. Your credit utilization rate is another factor in your credit score.
A personal loan can boost your credit by increasing your mix of credit. If you have never taken out an installment loan before, then this new type of credit will expand your credit history and have a positive impact on your score.
Flexible Use of Funds
Another pro of personal loans is that you can choose how to use the funds! Most other loans are purpose-specific, whether that's a mortgage or an auto loan. With a personal loan, you get the funds paid directly to your account to use as needed.
You get to decide how to use the funds whether it’s for a wedding, vacation, debt consolidation, medical expenses, and more.
Cons of Personal Loans
A personal loan might be the best option for you, but they aren’t the right choice for all financial situations. Think about these disadvantages before applying for one:
Unnecessary Debt
Personal loans can be a temporary safety net in terms of getting through financial hardship, but they’re not a permanent solution to avoid racking up debt.
Think about debt as its basic definition: You have more money going out versus coming in through your paycheck or earnings. If you want to control your debt, you need to reduce your spending and increase your earnings.
Don’t take out a personal loan if it will only lead to more unnecessary spending and unneeded debt. Personal loans are best when used to help you restructure your debt as you continue to pay it down.
Might Require Collateral
Personal loans may be secured or unsecured. A secured loan means you provide an asset in case you don't pay as promised. You may need a secured loan if your credit score or income doesn't meet the qualifying requirements, or if you want to borrow a higher loan amount than your lender offers.
The most common collateral for personal loans is the funds you hold in a savings or certificate account, or you may be able to snake a cash deposit. You can usually only borrow up to the amount that your lender keeps as collateral. Once you complete your loan term, you get the funds back.
With an unsecured personal loan, you don't need to provide collateral but you may be charged a higher interest rate. You can talk to a loan advisor about which option is right for you and how you can get the lowest rate possible.
Prepayment Penalties
Another con of personal loans is that there may be a prepayment penalty. This means you need to pay a fee if you want to pay your loan off early. Some lenders may not allow you to make extra payments, either. If you pay extra whenever you can, you will save on interest over the life of your loan.
So before you sign anything, make sure you understand the prepayment rules. Many lenders have no prepayment penalty, but be sure to confirm this before you commit to a loan.
9 Things to Consider Before Getting a Personal Loan
Now that you know some of the pros and cons of personal loans, it's a good idea to ask yourself these questions before choosing a lender and submitting your application.
- Do you meet the qualifying requirements with the minimum credit score needed?
- Is there any way you can improve your credit before you apply?
- Do you have enough income to meet all your payments on time through your entire loan term?
- Which financial institution is offering the best rates and is the rate lower than your other debts if you plan to consolidate?
- Can you get pre-approved to find the rate you will likely get for your credit?
- What loan terms are on offer? Keep in mind that shorter terms get lower rates and save on total interest, but longer terms have lower monthly payments.
- Are there any additional fees, like prepayment penalties?
- Are there any restrictions on how you use the funds?
- What are your payment options and can you set up automatic transfers from your checking or savings account?
Most importantly, have a game plan for how you’ll repay your loan. Be sure to add your payments to your monthly budget consistently on a monthly or biweekly basis depending on your paycheck cycle. Whatever you decide, stay consistent to work towards a fast payoff!
Apply Today with OUCU!
Before applying, take time to consider the pros and cons of personal loans that we mentioned here. Work out what will work best for your budget now and in the long term to decide what you can truly afford.
OUCU Financial offers personal loans of $1,000 to $25,000 with competitive rates and terms of up to 60 months. Click below to learn more!
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