Navigating the World of Personal Loans: What You Need to Know

Loans aren’t necessarily a bad thing; many people associate them with being afraid to fall into heavy debt, not knowing that they can help you achieve your financial goal—as long as you know how to use them. Whether you need to cover sudden essential expenses or fund a major purchase, you should first know about the pros and cons of availing of personal loans, which is what we’ll cover in today’s article.

Understanding Personal Loans: What You Need to Know in a Nutshell.

A personal loan is a type of loan wherein you borrow a certain amount of money in a lump sum and must pay it in fixed monthly installments over a certain period. The rates vary, and depending on how much you’ll loan, sometimes there’s a corresponding extra fee.

What are the different types of personal loans?

Personal loans come in different forms, but there are two main ones, which are the following:

Secured personal loans. This type of loan requires a borrower’s pledge, commonly called collateral, which can be a house or car, which will be surrendered if the debtor cannot pay. Compared to unsecured loans, this type of loan has a lower rate but also poses a higher risk of losing your collateral in the event of a default.

Unsecured personal loans. This type of loan has a high interest rate because it does not require collateral and only requires the debtor’s property or other assets.

What are the factors that affect the rates of personal loans?

There are a variety of factors that can affect a personal loan’s interest rate, but the most common ones are listed below:

Credit score. There are a lot of factors that can influence your interest rates, but your credit score, by far, plays the most crucial role since this will be the deciding factor on whether your loan will be approved or not.

Loan amount. As a general rule, personal loans that have larger amounts will consequently come with higher interest rates. So if you plan on taking one out with a pretty hefty sum, you might want to check its respective rate as well as if it has any extra fees.

Term. When availing a loan, the lender will offer you a structured payment plan that can range from months to years. For longer-term loans, it means you have a lower monthly payment, but you must also keep in mind that it also has a higher overall interest cost in the long run.

What are the advantages and disadvantages of availing of a personal loan?

Now that you know the basics about personal loans, you should also know their pros and cons so you can decide whether to take advantage of them or not.

Pros:

It offers a quick funding time. Once your loan application is approved, you can receive your funds the same application day, and even some as fast as 1-3 banking days.

You’ll receive the amount in a lump sum. For those who need the whole amount of their loan, getting your personal loan approved also benefits you because you can receive the full amount at once.

You don’t need collateral. Those availing of unsecured loans can easily get approved without the need for collateral as long as they have a good credit score.

They offer lower interest rates. Availing personal loans also offers lower interest rates compared to availing them via credit cards.

It can be used for a variety of purposes. One of the great advantages of availing of personal loans is that it can help pay off your necessities, whether you want to focus on your home renovation or even make a big purchase. It doesn’t need to have a specific purpose, with some lenders offering a steep amount, so much higher than credit card companies offer.

Cons:

There’s no payment flexibility. One of the glaring disadvantages of availing of a personal loan is that you have to pay the agreed-upon fixed amount monthly, unlike in credit card payments, wherein you can just pay the minimum amount.

You can incur high penalties and fees. Depending on the amount you want to take out, higher amounts tend to have higher fees, which are directly deducted from your loan fund; some even go as high as 10 percent or more.

At the end of the day, taking out a personal loan can be a great financial tool as long as you know how to use it properly and responsibly. By understanding the ins and outs of personal loans, you can plan your finances accordingly so you can avoid pitfalls and financial burdens.