How a Personal Loan Works: The Pros and Cons of Taking Out One


How Personal Loans Works

 A personal loan can be a helpful way to access cash in a pinch. The downside is that these loans tend to come with high-interest rates and other expenses. Even so, in certain circumstances, taking out a personal loan can make sense. These loans are not something you want to take lightly though. Personal loans are usually only necessary when you have exhausted all other financing options — perhaps other than getting a high-interest credit card, or resorting to asking a family member for money. When taking out any loan it’s important to understand the terms and conditions before agreeing to them. Before signing on the dotted line, read up on what a personal loan can offer you. Here are some pros and cons of taking out a personal loan:

Pros of Taking Out a Personal Loan

Personal loans are quick and easy to obtain, and the approval process is often quite straightforward. With a loan you can get the cash you need in a timely manner without having to wait as long as you would for a traditional loan, such as a mortgage. If you need money in a hurry, a personal loan might be the best solution. Personal loans can help cover expenses that you don’t have the funds for right now, such as car repairs, or medical bills. You can use a personal loan to make necessary purchases, as well as pay for unexpected bills. Personal loans are usually very flexible. Depending on the lender, you might be able to make payments on your loan a few times a month, once a month, twice a month, or even once a week. These options can help you manage your budget, especially if you’re able to make larger payments a couple of times each month.

Cons of Taking Out a Personal Loan

One of the biggest cons to taking out a personal loan is the high-interest rate that comes with it. These loans tend to have higher interest rates than other types of loans because they are unsecured, and you have a poor, or non-existent, credit history. You also may have to repay the entire loan in a short amount of time, whereas with a mortgage, or home equity loan, you can pay off the loan over a longer period. Personal loans also come with additional expenses, such as application and origination fees, late payment fees, and other penalties. You may even need to pay a fee to have the interest rate reduced. These expenses can add up and lead to higher overall costs over the life of the loan. Personal loans are usually unsecured, which means that you can be at risk of losing your assets if you can’t repay the loan. If you fail to repay the loan, the lender can take your assets to repay the debt, including your house and car.

When Taking Out a Loan Makes Sense

There are many types of loans out there, including mortgages and car loans. Personal loans are a subcategory of unsecured loans that have less stringent qualifications. Usually, you must be at least 18 years old with a steady job and good credit history to qualify for a personal loan. Credit unions offer these types of personal loans. Banks will sometimes offer personal loans, but they are less likely to do so than a credit union. Personal loans often make sense if you need money quickly and don’t have the time to wait for other forms of financing, such as a car loan, or home equity loan. You also might want to consider a personal loan if you need a small amount of cash, such as $1,000 or less.

When a Personal Loan Does Not Make Sense

Personal loans do not make sense when you can’t afford the high-interest rates associated with them. In some cases, banks and credit unions will offer low-interest personal loans, but these are typically reserved for special circumstances. If you have poor credit, it can be harder to qualify for lower-interest rates on personal loans. This can make it difficult to repay the loan, especially if you need a lot of money. You should also avoid taking out a personal loan if you can’t repay it in a timely manner. Personal loans are typically unsecured, so if you can’t pay off the loan, the lender can take your assets. This can affect your credit score and make it harder to get additional loans in the future.

Key Takeaway

Personal loans are quick and easy to obtain, but they often also come with very high-interest rates. In certain circumstances, however, a personal loan can make sense. This is most likely when you need the money quickly, but it can also make sense if you need a small amount of cash. If you are considering taking out a personal loan, make sure you understand the terms and conditions of the loan, then work to make a budget to see if you can’t find a better way to fund your expenses.

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