Personal loans are a serious financial commitment. They are a fixed amount of money that your lender can loan you. You must pay this back over a set period of time. Personal loans can be used for a range of things such as a wedding, home renovations, travel, or debt consolidation.
Personal loans are a big commitment. They require adding a new regular expense to your budget. Therefore, it’s crucial that you carefully consider the pros and cons of a personal loan so you can make a fully informed choice and ensure it's the right option for you.
Let’s take a dive into the pros and cons of a personal loan.
Pros of a Personal Loan
1. Improve your Credit Score
When your personal loan is paid out to you, your repayment plan will begin. This means that you must pay the loan back in set increments over a fixed period of time. Whenever you make a successful repayment as per the contract signed and payment plan, your credit history builds. The more you pay on-time, the higher your score will be. This will help you later if you decide to apply for a home loan.
2. Pay Overtime
A personal loan can be a great way to pay for a large expense such as a wedding, car, or home renovations without dipping into your savings. Rather than lose a large chunk of your money at once, you can pay it off over time in more manageable increments.
3. Debt Consolidation
A personal loan can be a great way to consolidate your debts into one. Rather than having multiple bills and balances to pay from other loans and credit cards, you can consolidate your debt into one personal loan. This can be an easier way to track repayments, organise your budget, and avoid missing due dates.
Cons of a Personal Loan
1. Interest Charges
Whenever you take out a loan, including a personal loan, the lender will charge you a certain amount of interest. This is a fee for the money you have borrowed. The interest is added to your principal balance over time, and it is included in your repayments. Depending on your credit history, your interest rate can be quite high, especially if you have a low credit score. This is because the lender considers you a risk, and will charge you more to compensate for that.
However, the best way to find the cheapest personal loan for your unique needs is to jump on Money Compare and compare different interest rates on the market so you avoid paying for more than you need to.
2. Fees and Penalities
There are generally a range of fees and penalties that can come with a personal loan. They will be outlined in your contact. For example, lenders tend to charge fees if you default or miss a payment. If you lose your job, your default payments and fees can add up and put you in more debt and stress.
3. Contract Limits
When you take out a personal loan, you sign a contract. That contract will lock you into a fixed amount of time for your repayments. Adding another regular bill to your budget can limit your financial flexibility and make it a little harder to save money. If you decide to pay off the loan early, you may be liable to an early settlement fee.
Compare Cheapest Personal Loans
It’s important to think critically and carefully about whether a personal loan is right for you, and your financial situation. Can you afford to add another payment to your budget? Will you be able to pay off the repayments regularly, without pinching yourself, or stretching yourself too thin?
To find the cheapest personal loan, and the best deal for your unique needs, it’s important to compare. Jump on Money Compare to compare different personal loans available to you so that you can find the right lender and interest rate for you, and avoid paying for more than you need.
