Taking out a personal loan is a significant financial decision. While personal loans can be used to fund exciting things such as travel and weddings, they must be considered carefully. Personal loans are a fixed amount of money that you can borrow from a lender such as a bank or other financial institution, that you must pay back over time. As such, a personal loan adds another expense to your budget. Be sure to consider the advantages and disadvantages before you submit your application for personal finance.
The Advantages of a Personal Loan
Improve your Credit Score
You will begin repaying your personal loan as soon as the funds are released from the lender. These repayments will be in determined increments over the fixed term. With each successful and on-time payment, this information will be recorded in your credit history. The more repayments you make successfully, the higher your score will be. If you decide to apply for a home loan in the future, your positive credit score will work in your favour, and help demonstrate your ability to make payments on time.
Pay Overtime, Rather Than All at Once
A personal loan allows you to keep your savings, by making the payments for your car, wedding or renovations easier and more manageable over time. You don’t have to drain all your savings.
Consolidate Debt into One Bill
Instead of having multiple loans and credit card balances still to pay, you can consolidate your debt into one loan. This means, rather than having multiple bills and repayments to keep track of, you just have to pay one. This can help you stay on track, organised, and help you avoid missing a payment. With a debt consolidation, your lender will pay off your other debts directly instead of paying out the loan to you.
The Disadvantages of a Personal Loan
You’ll be Charged Interest
One of the downsides to taking out a loan is that you’ll ultimately be paying more money than you would if you just paid for the item or event outright. A lender will charge you interest as a fee for the money you have borrowed from them. This interest is added overtime to the total amount of money you have borrowed, and it is included in your repayments. Be sure to jump on Money Compare to compare personal loan interest rates on the market, so you can find the best deal possible for your needs.
Fees and Penalties
Most lenders will charge fees in the contract of the loan. They will often charge a fee for a default payment, and if you choose to pay the loan off early. Default fees can become quite distressing especially if you lose your job.
Locked into a Contract
A personal loan is a commitment to a contact. This means you are locked into a certain amount of time where you’ll be paying it back. As such, you’ll have another expense to consider, which can limit your financial flexibility and ability to save money. It can be especially difficult in this cost of living crisis.
Consider and Compare
A personal loan is a serious financial commitment. You want to be sure you can afford the repayments, without over-stretching your budget, so you can still be financially sound and comfortable. It’s vital you take the time to consider whether it is right for you, before pressing submit on your application. Don’t forget to compare. This is the most effective way to find the best deal and avoid paying more money than necessary.
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