Are you considering a personal loan? If so, there are some pros and cons to consider before accepting an offer. Here’s what you should evaluate in advance.
Life doesn’t always run smoothly. When you find yourself in need of money at short notice, a personal loan can be incredibly helpful. With that said, borrowing money is not always the best solution to such problems. Before you enter into a loan agreement, it is important to understand what your responsibilities will be and the possible pros and cons.
What is a Personal Loan?
In essence, a personal loan is a financial agreement between you and your lender. This is the same for any kind of loan – for example, a mortgage, or even a line of credit such as a credit card or store card.
Personal loans tend to be less substantial than business loans or mortgages, however, and less flexible than credit cards. When you take out a personal loan, you will receive a specific sum of money, along with a set repayment plan that includes interest. Such a loan may be secured (attached to a form of collateral) or unsecured (based on your creditworthiness alone).
How to Apply for a Personal Loan
Knowing the process of applying for a loan is an important part of understanding the possible benefits and pitfalls. Let’s take an online company such as Upgrade as an example. Because it is an online business, if you apply for an Upgrade personal loan, this will be quick. That is a big benefit associated with all online lenders.
Before you begin the application process, you should decide how much you want to borrow, what loan options are out there, and the possible interest rates. Once you have some options in mind, you can begin applying. Here is what you can expect from the online application process:
Soft credit check (optional)
Some lenders offer the opportunity to utilize soft credit checking software to give applicants an idea of whether they are likely to be accepted and what they might be offered. It is a good idea to use these features, as they will give you an idea of whether a hard check is likely to be fruitful. If the soft check comes back negative, it is best to avoid a hard check. Hard checks impact your credit score, so minimizing the number you undertake is a good idea.
Hard credit check (necessary)
Whether you use a soft credit check or not, you will need to authorize a hard check before you are offered a loan (or not). Lenders will check your credit score, current debt levels, and income to decide whether or not they will offer you a loan and what the interest rate will be.
If you are offered a loan, the lender will give you terms to agree to. These terms will include how often you make repayments, the amount of each repayment, the term of the loan (how long it will take to repay), and the interest associated with it. Read this carefully before making a decision.
Once you have an offer, it’s time to decide whether or not to accept it. This is where the pros and cons of a personal loan become crucial.
Taking Out a Loan: The Pros and Cons
The benefits and potential drawbacks of a personal loan can vary depending on your situation, but there are some pros and cons that remain consistent. These are:
- Quick access to the money you need.
- Competitive interest; personal loans tend to have relatively low interest rates compared to other forms of loan or credit.
- The ability to build credit if you make all repayments on time.
- Spread the cost of emergencies.
- The ability to consolidate smaller debts and simplify your repayment plan.
- Hard credit checks damage your credit score.
- Potential damage to your credit score; if you have a relatively high proportion of debt compared to your income, your credit score will suffer.
- Possible fees and penalties if payments are missed or late.
- Increased interest for those who have poor credit already.
Taking on a financial obligation may be necessary from time to time, but it is important to understand how it may impact you in the long-term. Going in with your eyes open is important when it comes to making a personal loan work for you in meeting your short and long term goals.