Personal loans are one of the most commonly used quick cash loans out there. If you are thinking of getting a personal loan, you may be asking yourself, “are personal loans bad?” Personal loans have their uses and can be helpful for a variety of emergencies. At the same time, any kind of debt can become harmful if handled irresponsibly. Below you will find more information on the potential advantages and disadvantages of personal loans.
A Few Advantages of Personal Loans
Here are some general advantages that come with personal loans:
- Use Them for a Variety of Expenses — Most personal loans are available for a few hundred dollars up to a few thousand dollars. Therefore, you can use personal loan funds for all kinds of expenses or emergencies, making them a versatile loan option.
- Reasonable Rates for Those with Good Credit — With a good credit score and positive credit history, lenders could offer you great interest rates with a personal loan. Compared to other commonly used financial products—credit cards—personal loans can have lower interest rates for fair and prime borrowers.
- Personal Loans are Widely Available — Get a personal loan at a bank, credit union, through a financial institution, or online lenders. In most instances, applying for a personal loan only takes a few minutes, and once approved, the funds are sent straight to a bank account.
- Can Help Consolidating Debt — You can consolidate debt to save money with a good interest rate on a personal loan. This process could be the perfect cost effective solution to pay off debt faster.
Are Personal Loans Safe? — Potential Disadvantages
A personal loan can have some disadvantages. Before you decide to get a personal loan, you should pay attention to potential negatives in some loan terms. Also, think about the impact on your credit and choose the right loan lender to get the most from a loan. Here are some potential disadvantages to look out for:
- Personal Loan Interest Rates Can Be High for Poor Credit — If you qualify for a personal loan with bad credit, the chances are that the interest rates will be high. High interest is costly and can lead to a cycle of debt if you cannot repay the loan on time.
- Secured Loans Put an Asset at Risk — If you cannot qualify for a personal loan with your credit score, many lenders will ask for an asset to provide financial protection until you pay it back in full. For secured personal loans such as home equity loans or auto loans, the lender will have the right to the asset if you cannot repay the entire loan amount.
The Biggest Factor That Determines Whether You Can Trust a Personal Loan
Personal loans are not inherently bad. And whether they will hurt your finances will depend on how you handle the funds and how you repay them after taking out a loan.
When taking out a loan, you never have to borrow more than you need. Only borrowing what you need will ensure that you aren’t adding more debt than necessary on your plate. Adding another loan can impact your debt-to-income ratio. If the amount of debt you have goes beyond a certain percentage, it can hurt your credit score with all three of the major credit bureaus. And so, keeping track of your credit usage after getting a personal loan is another positive step.
Making late payments on a loan can have a substantial negative impact on a credit score. And so, make sure once you take on the loan that you can make timely payments. For many people, having a direct payment from a bank account to a loan is an easy way to ensure that their loan is paid back on time each month. Paying off your loan early (if you can do so without fees or penalties) can be a great way to stay on top of debt.
One of the most important things you can do is avoid defaulting on the loan. Loan default happens when you continue without repaying the loan. When a loan defaults, it will show up on your credit history for many years. There is also the potential of falling into debt with a personal loan. Especially if you have had trouble managing debt in the past, you may want to consider learning better money habits before taking out a personal loan.
Finding the Best Personal Loans
Before choosing a personal loan, there are a few things to look into about the loan:
- The Interest Rate — interest rates can be the most expensive costs of borrowing a loan. And so, it is essential to compare personal loan rates to find the best rate or look at other loan options before choosing.
- The Repayment Period and Loan Terms — with personal loans Having more time to repay a loan can seem like a good thing. However, it will also mean paying more interest over time. Finding the sweet spot between having a comfortable repayment plan and not extending repayment to cost more will be helpful.
- The Loan Amount —The loan amount is also an essential part of considering what loan is best for you. You should find a loan that covers the expenses without costing a ton to borrow.
- Lender Benefits — Some lenders will offer things like perks for repeat borrowers, like better interest rates for those who make on-time payments, credit counseling, and more. It is always a good idea to research a lender before you borrow money from them.
- The Monthly Payment and General Affordability — Before choosing one loan over another, make sure you factor in any origination fees, balloon payments, and interest rates. Once you factor in all that, you can calculate your monthly payments and the total amount of debt you are truly taking on.
The Bottom Line
Before choosing a personal loan option or other loans, be sure to get a thorough look at the details.
Look at the interest rate offered, ask a lender about loan terms and possible loan amounts. Also, ask about whether your loan will require collateral as a secured loan, what the monthly payments will look like, and whether you can pay back the loan early through a lump sum.
In general, whether you use a credit card, personal loan, payday loan, or anything else, it is best to use them for serious emergency expenses. So, only use these loans for expenses like medical debt, car repair, etc. Try to avoid taking out a personal loan for purchases that aren’t a necessity, like a major purchase or just general spending.