Pros and Cons of a Personal Loan
Let’s start with what a personal loan is and why it’s so popular among American citizens. A personal loan is a loan where the money you borrow is deposited straight away as a lump sum on your bank account. Every month you pay off a set amount of the initial loan and interest. The interest rate of the loan is fixed as well as the duration. Paid off amounts, you cannot withdraw again. This way, you know exactly when you’re done paying of your loan. A personal loan is being used most often for home renovations or buying a new car.
Personal Loan Pros
– Fixed duration. You know when you’ve paid off you loan
– You pay a fixed monthly fee
– The interest percentage is set as well, so you know what you’re signing
– The borrowed amount is being deposited as a lump sum on your account
– If the loan is being used for a home renovation for your property the loan is tax-deductible from your income tax in contrast to a revolving credit
Personal Loan Cons
– You cannot withdraw the paid off amounts again. Because of this, a personal loan is less flexible than a revolving credit
– With certain loan providers, you cannot pay off in advance penalty-free. Our advice is to always search for a loan provider who allows you to pay off in advance penalty-free.
Tips for taking out a personal loan
Most of the time, it costs loads of money to realize a dream. A personal loan, however, can give you the key to your goal(s). Once you take these few tips and tricks into consideration, you might avoid a financial setback afterward.
In contrary to a home loan, you don’t have to justify anything about where the money is being spent on with a personal loan. Whether you invite all your friends to a huge party or need money to buy a speedboat, it doesn’t matter anything to the loan provider. Most of the time, you don’t even need to show them purchase invoices. So obviously, getting a personal loan is super easy and is being done without much hassle.
Although a personal loan makes life a whole lot easier, especially when significant amounts of money are involved, it’s not to smart to use a personal loan for every considerable expenditure. The more loans you have, the more difficult it becomes to maintain an overview. This also increases the risks of getting into financial problems. Choose the goals of your loans carefully.
Beware of high-interest rates (and bad terms)
Just as is the case with home loans, you always have to compare the interest rates of offered loans. Some loan providers handle very high-interest rates that can make your loan extremely expensive.
Decide what amount you need and shop around several loan providers. Ask for the annual percentage rate (APR) that shows exactly what you’ll be paying yearly. In the APR, it is not only the interest calculated but also additional costs like commissions and administration fees.
Decide if it’s not a little wiser to borrow a slightly higher amount than necessary. It could be the case your yearly APR drops as a result, which makes your loan cheaper.
Carefully look at the amount and duration
Most personal loan amounts differ between $2500 and $100,000. If you want to borrow more than $100,000 you might have to search for a different solution. A personal loan is a form of consumer credit that is capped or limited at $100,000. You might be able to borrow more, but then you have to have excellent credit and have a yearly income of at least $150k.
The ideal duration will vary depending on the borrowed amount. Most of the time, this duration varies between 18 to 24 months. Please note, the longer the period, the higher the interest. Never borrow more than necessary. On this website, you can compare usual interest rates for specific timeframes (durations).
Is a specific loan more interesting?
For some goals, it’s more interesting to get a specific loan. For example, if you want to buy a new car, a car loan is way more interesting, interest-wise. This is the case because you can use the vehicle as collateral.
The same counts for home renovations. Do you want to spend money renovating your home for let’s say a new kitchen? Then a home renovation loan is more interesting. With this kind of investment, the interest is way lower than a personal loan as the loan provider get’s decent collateral in return.
Respect your elders
For a personal loan, you can get a debt balance insurance. Using one of these insurance policies, you won’t burden your elders or other family members with personal debts. Especially in the case of more significant amounts, debt balance insurance is well worth taking.
Do keep in mind, a debt balance insurance for a personal loan isn’t cheap. Always check if this insurance is necessary and compare different providers accordingly.
Now that you know the pros and cons of taking out a personal loan, you’re ready to compare several different loan providers without falling for any of the common pitfalls. If you still have any questions, you can browse our other personal loan related articles or contact us.