Personal loans are a fixed amount of money that you borrow from a lender such as a bank or other financial institution, that you must pay back over a set period of time. You can use your personal loan for a range of things such as a wedding, renovations, travel, or debt consolidation. Getting a personal loan can be a quick way to get quick cash but they are a financial commitment, and there are things you should consider before getting one, such as the pros and cons.
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What are the Pros of a Personal Loan?
1. Build your Credit Score
When you receive your personal loan, you will immediately begin the repayment process, where you must pay the loan back in increments over the course of the fixed term. Each time you make a successful repayment, this will be recorded in your credit history, and will help you build your credit score. This can be great for later if you decide to apply for a home loan.
2. Allows you to Pay for Something Overtime
A personal loan is a great way to avoid dipping into your savings. It means you can pay for your wedding or car over time, rather than draining your savings all at one, making the purchase more manageable.
3. Easy to Consolidate Debt
Instead of having several loans and credit card balances to pay, you can consolidate your debt into one loan. This can make it a lot easier to keep track of repayments, organise your finances and expenses, and help you avoid missing a payment. In the event of debt consolidation, your lender will pay off your other debts directly, rather than paying you cash.
What are the Cons of a Personal Loan?
1. Interest Charges
When you take out a loan, the lender will charge you interest as a fee for the money you have borrowed from them. This interest is added to your principal balance over time, and included in your repayments. Interest means you will be paying more money for the purchase than if you just paid for it outright. However, you can jump on Money Compare to compare the interest rates for personal loans on the markets and make sure you are choosing the best deal possible.
What is the Cheapest Personal Loan?
2. Fees and Penalties
Most lenders and banks will charge fees, especially if you default a payment or choose to pay the loan off early. If you lose your job suddenly, default fees can add up and squeeze your budget, putting you in a stressful situation.
3. You are Locked into a Contract
Personal loans mean you are committing to a contract – a fixed amount of time where you will be making repayments. This means you’ll have one more expense added to your finances, and it can limit your financial flexibility, and capability to build your savings. Again, there can also be those pesky early repayment fees, if you decide to pay off the loan early.
Consider Carefully, and Compare
A personal loan is a financial commitment. Be sure to carefully consider whether it is the right choice for you. And COMPARE. Jump on Money Compare to compare the different personal loans on the market so that you can make the most informed choice, avoid paying too much, and set yourself up for financial success.
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