Personal loans are becoming quite popular for those individuals looking to consolidate their debt. They may have a variety of reasons to choose this path, such as a home renovation project or planning a major purchase. The premise is simple to understand as you borrow a predetermined amount of money that will be used to pay off all of your debt.
This approach may help to manage your finance in the interim, but the cons of personal loans is it doesn’t address the issue of how you accumulate such a large amount of debt in the first place.
What is a Personal Loan?
Personal loans have a completely different format than credit cards as the agreement is considered a personal installment loans. This means you’re borrowing money from a bank or lending institution who expect to be paid back in monthly increments over a fixed amount of time. Usually, the length of a personal loan is between two and five years, but the terms might be as short as one year or as long as seven years. The lone plus in your favor is the interest rate is fixed for the entire length of the loan.
The Disadvantage of Fixed Payment
Despite the benefits of receiving instant cash, there are cons of personal loans and many believe it’s not the best source to borrow money. One of the drawbacks is having a fixed payment plan in place to pay back the loan. That means you will have to pay the same amount of money each month regardless of your current financial situation.
It’s important to make sure you have the financial capacity to make each payment before agreeing to the terms of a personal loan. If you cannot repay the lender, then you run the risk of them seizing your personal property (home or automobile) which was put up as collateral to secure the personal loan. Other lending institutions will initiate a lawsuit to sue you for nonpayment of the loan.
Personal Loans Have a Higher Interest Rate Than Other Loans
Another example of the cons of personal loans is individuals with poor credit can get personal loan online, but it comes with a higher interest rate than other loans. Typically, borrowers with a good credit history receive a lower interest rate on a personal loan as the range is much like a credit card. This isn’t the case for individuals with a poor credit history as their minimum payment will be much larger than other loans.
Personal Loans Come With Origination Fees
In addition to the high interest rate, another cons of personal loans is they come with an origination fee, which covers the cost of processing the loan application. Usually, the fee is between one-to-six percent of the total amount borrowed. The dollar amount must be paid up front prior to the personal loan application being approved. Some lenders suggest the payment is the first in a series that secures the personal loan.
Prepayment Penalties Associated With Personal Loans
When an Individual uses a credit card, they can avoid paying interest on their purchase by paying off the entire balance on their next payment due date. However, that isn’t the case for a personal loan, even if the borrower can afford to complete this task.
Most lending institutions will charge them a prepayment penalty if the borrower pays off the personal loan early. A fixed interest rate is their only opportunity to make money off the deal.
The Potential is High to be Scammed
One of the biggest cons of personal loans is the risk the lender isn’t legit. Scammers take advantage of desperate individuals by offering their assistance shop personal loans if they fill out a credit application. This will further jeopardized your own credit history as they will steal your identity by shopping for credit cards in your name.
A personal loan is a convenient way to borrow money, but for some individuals, it may not be ideal for their current financial situation. The cons of personal loans are too risky. Take a hard look at yourself before choosing this path.