The Pros and Cons of a Personal Loan: What to Consider

If you need cash, a personal loan may be a good option. A personal loan can also be a good alternative to using the equity in your home or a credit card to finance some expenses, in certain situations.

As with any other form of debt, there are pros and cons to be aware of before applying for a personal loan. If you are thinking about taking out a personal loan, here are some things to consider before moving forward.

Pros of Personal Loans

1. Offers Versatility–While some loans can only be used for certain purposes – such as a car loan – personal loans can be used for virtually anything, from consolidating debt, starting a small business to funding a wedding. Most financial institutions will let you use the funds for nearly any personal, family or household expense.
2. Can Help Build Credit–You will have to make monthly payments, and your lender will report your payment history to the three credit bureaus. If you pay on time every month, it will have a positive impact on your credit score.
3. Way to Consolidate Debt–If you’re looking to pay off outstanding debt and credit card balances, consider a personal loan to consolidate that debt. This financial strategy will help combine outstanding balances into one payment and can help reduce overall interest costs.
4. No Collateral Needed—Most personal loans are unsecured and will not require collateral making it a popular alternative to various forms of secured financing such as home equity loans and home equity lines of credit (HELOC).
5. Provides Ability to Pay Over Time–A personal loan allows you to spend a lump sum of money and then pay it back typically over the course of 12-60 months. The interest rate you secure when approved for the loan will be fixed over the repayment period so your monthly payment amount will be consistent making it easier to budget and plan. However, the longer the loan term, the more interest you’ll end up paying over the life of the loan.
6. Offers Competitive Interest Rates–As with most loans, the higher your credit score, the lower the interest rate you will pay for a personal loan. No matter your credit score, other types of financing, like some credit cards, title loans and payday loans, usually carry a much higher interest rate than a personal loan.
7. Provides Flexible Limits–Personal loans are typically available in amounts between $1,000 and $100,000, depending on the borrowing limits set up by various lenders. This wide range makes it possible for you to tailor the amount to your specific needs.
8. Typically Receive Quick Decisions–The application and approval process for a personal loan is relatively quick with most lenders. This feature makes personal loans a great option if you need to cover an unexpected medical bill or emergency car repair. Applying online gets you the fastest decisions.
9. Easier to Manage Payments–Compared with having several credit cards with varying interest rates and due dates to pay off a debt, a personal loan that comes with a single, fixed-rate monthly payment is easier to manage. If you qualify for a personal loan with a lower interest rate than your credit cards, you can streamline your monthly payments while saving money.

Cons of Personal Loans

While personal loans offer many advantages over other types of borrowing, it is important to understand the drawbacks of a personal loan, as well.

1. Interest Charges–The ability to pay off a balance over a period of months comes with the downside that you have to pay interest. Depending on your credit and the lender, your APR could be anywhere from around 6% to 36%.
2. Potential Fees—Some lenders may charge origination fees, which can range from 1% – 8% of the loan amount. Additionally, some financial institutions have late payment fees or prepayment penalties if you don’t pay on time.
3. Short-term Credit Impact–Applying for a personal loan will result in a hard inquiry on your credit report. This may cause a small, temporary drop in your credit score. In addition, the extra money you owe will raise your debt load, which will also impact your score and make it riskier for lenders to give you additional loans. As long as you use the loan and other credit responsibly, you should bounce back quickly.
4. Potential for Unnecessary Debt—Taking out a personal loan can lead to a larger amount of debt. It is important to understand why you are borrowing the money and whether taking out a personal loan is the best solution for your financial needs.
5. Higher Payments–Personal loans may come with a higher fixed monthly payment than credit cards and also must be paid off by the end of the loan term. If your finances are tight, these higher monthly payments can be difficult to manage, and you may be at risk of defaulting on the loan.
6. Potential Financial Risks–Missing or making late loan payments could negatively affect your credit in several ways. Defaulting on a personal loan will significantly reduce your credit score and show up as a negative mark on your credit report for as long as 7 years.

All in all, personal loans are useful for a large variety of purposes, and they allow you to pay off big expenses over time. However, you want to be conscientious when considering taking out a personal loan to avoid putting your long-term financial well-being at risk.

If you would like to learn more about personal flex loan options available at Town & Country that can help you reach your financial goals, reach out to connect with a member services representative by emailing us at info@tcfcu.com, calling 800-649-3495 or book a consultation here.