Personal Loans offer you the opportunity to borrow money from a financial institution, such as a bank and gradually repay the amount borrowed in installments over an extended period of time. A personal loan can be taken out for a wide variety of reasons such as financing an extention, going on holiday, or even paying for private medical treatment. In exchange for the personal loan, you will be required to pay interest on the amount you have borrowed, which means that the total amount you repay will exceed the initial value of the personal loan.
Before you decide to take out a personal loan, consider all your options carefully and make sure that you will be able to afford the repayments. Failing to make repayments will have a detrimental effect on your credit rating. But if you handle it correctly a personal loan can enable you to manage your finances more easily and provide you with extra finance when you need it most.
When you understand the advantages and disadvantages of personal loans in general, comparing the loans on offer will prove easier.
Advantages of a Loan
Loans are a fast way to obtain funds for a special purchase or project, and even large amounts can be borrowed for almost any purpose. They are suitable for expensive purchases that require immediate payment, allowing you to spread the cost of the purchase and manage your short term finance easily.
There is a lot of competition amongst lenders, which usually makes it possible for you to negotiate a cheaper interest rate than the one which you are initially quoted. It may also be worth investigating whether there is a specialist lender who can provide loans tailored to your specific purpose, for example buying a car, since they may offer you a cheaper or more suitable loan.
Disadvantages of a Loan
Loans constitute a long-term financial agreement and used in the right way can be a useful financial tool. Anyone considering applying for a loan should look at their income and expenditure carefully, and calculate exactly how much they can afford to borrow based on how much money they can spend on repayments each month, once their other financial committments have been honoured.
If you cannot afford to make repayments when they are due, you may face a penalty. If you have chosen to take out a secured loan, you may even lose your home. For this reason it is important to read all the ‘small print’ of any loan contract to see what penalties could be levied, and consider whether or not you should be applying for a loan at all. If you default on the loan, your credit rating and ability to access credit in the future will be detrimentally affected.
You could also be penalised for making a large lump sum repayment to pay off your loan sooner than agreed. Although most loan companies will allow you to do this, they may charge you an early repayment fee.
For anyone wishing to borrow only a small amount that they aim to pay back within a short period of time, a credit card may be a better solution because the balance can usually be paid off in full at any time without incurring early repayment fees.