Personal loans are a fast and easy way to get money if you’re in a financial bind. You may need some quick cash for a medical emergency, for a family event, or to pay off some debt that’s accruing high interest. With proper use, a personal loan can be of great help to you.
But before you apply for that personal loan, there are certain things you’ll probably need to know so you’re armed with knowledge before you sign on the dotted line.
Personal loans defined
A personal loans is a financial instrument that provides you with money that you need to pay back in instalments. This type of loan is defined as an unsecured loan, meaning you won’t need to provide collateral to apply for it and get approval.
The payment terms for a personal loan can run between one year up to ten years for some institutions. Some lending institutions will also have more short-term payment plans.
The interest rate applied to a personal loan is a fixed rate so you won’t have to worry about the interest rate changing while you’re paying off your loan.
Personal loan advantages
- A personal loan is a great option for people who want to buy a big-ticket item but don’t want to put up collateral like their house or vehicle just get some money to pay for it. It’s an easy, fast, and safe way to get cash.
- If you’re trying to consolidate your various debts then a personal loan is also a great choice to help bail you out of your situation.
- A personal loan is arguably the most flexible loan instrument you can find in the market. Other loan types will impose conditions on how you can use the money you get (like a student loan or a mortgage loan). You have the freedom to use the money for your specific need.
- Personal loans have more manageable interest rates. The rates are oftentimes even lower than credit card rates. The interest rate will be even lower if you show a good credit score.
- Fixed interest rates are another great advantage of personal loans. You won’t have to worry that the interest rate will suddenly increase while you’re paying off the loan.
- Unlike other loan instruments, you are not required to present great credit history or low credit score to qualify for a personal loan. Regardless of your credit score, you’ll find a lending institution that will entertain you and approve your loan application.
Personal loan disadvantages
- While personal loans have lower interest rates compared to, say, a credit card. It may still have a higher rate compared to a secured loan (for example, a home equity loan). If you have a poor credit score, the lending institution will likely impose a higher interest rate on your loan.
- A personal loan will have some “hidden” fees that could add up. For example, it’s not uncommon for this type of loan to have what is called an origination fee. This fee, usually between one to six per cent of the loanable amount, is imposed as payment for loan processing.
This amount is either included in the loan or deducted from the amount they will award you for the loan.
- A personal loan requires that you pay a fixed amount on a monthly schedule. While some borrowers welcome this arrangement, some may find this challenging especially if you’re more used to small monthly minimum payments that you pay off long-term.
Weighing the pros and cons
A personal loan has its pros and cons but for many, the advantages far outweigh the disadvantages. If you’re in need of quick cash then a personal loan can definitely be a lifesaver. If you’ve got a good credit score, you can even expect to enjoy lower interest rates that will make paying off your debt more painless.