A personal loan may be a smart alternative if you are in need of money. Personal loans can give you with the funds you require to pay unexpected bills or consolidate debt. However, there are certain drawbacks that you should be aware of before applying.
What are Personal Loans?
A personal loan is a fixed-term loan that you can borrow from banks, credit unions, online lenders, and other financial institutions.
The loan term of a personal loan can vary, but is typically between one and five years. Personal loans can be used for many purposes, including consolidating debt, paying for unexpected expenses, or financing a large purchase.
Pros of Personal Loans
Let’s take a look at some of the advantages of personal loans:
1. Ability to Consolidate Debt
One of the most significant benefits of personal loans is that they may be used to consolidate debt. If you have several loans with high interest rates, a personal loan might help you save money by consolidating them into a single loan with a reduced interest rate.
For example, if you have multiple forms of debt, such as medical expenses, credit card debt, an installment loan, and other loans, you may consolidate them all into a single personal loan with a single monthly payment.
By putting multiple debts into one loan, you make your life easier.
2. Lower Interest Rate
Another big advantage of personal loans is that they typically have a lower interest rate than credit cards. Credit cards typically have an interest rate between 15% and 30%. Personal loans, on the other hand, typically have an interest rate between 5% and 9%.
So, if you need to borrow money for a large purchase or to consolidate debt, a personal loan can save you a significant amount of money in interest payments.
3. Higher Limits
Taking out a personal loan typically offers higher debt limit than that of a credit card. This means you can fund larger projects that other revolving credit might not offer. Of course there is a downside to this as you can easily get yourself into financial trouble if you take out too large of a loan.
Cons of Personal Loans
1. Chances of Overspending
The biggest downside to personal loans is your risk getting to more debt with them. They are simply another way for you to borrow money and if you don’t have the means to make the monthly payment amount, you could end up ruining your credit over time.
So before you take out a personal loan and incur more unnecessary debt, make sure understand your financial situation, that you need the money and you can pay it back.
2. Additional Fee
Another drawback of personal loans is the added fees you pay for borrowing money. Many lenders require you pay an origination fee on the amount you borrow. There might even be loan processing fees and application fees as well.
3. Higher Monthly Payments
One of the biggest cons of personal loans is they can have higher monthly payments. This is because the loan is for a fixed period of time that you need to pay it back by. With your credit card balances, you can pay these back over as many months or years as you like. But with this and the higher interest rates you pay, you will be putting yourself in a much worse financial situation.