If you’re considering taking out a personal loan, it’s wise to clue yourself up on the benefits and drawbacks first.
Here you can read our stripped back, no-nonsense list of the pros and cons.
Before we look at some of the reasons why a personal loan might be the right choice, let’s look at the disadvantages:
- Borrowing can be expensive! When you take a personal loan you have to pay interest on what you borrow, so whatever you buy will end up costing you more than if you used the money from your savings instead. Just how much interest you have to pay will depend on the individual lender.
- When you take a loan you are committing to making repayments regularly each month until it is paid off. You will have to budget for the loan for many months, sometimes stretching over several years dependent on how much you borrowed. If you don’t keep up your repayments you could face damage to your credit history and you may face additional charges. This is why it’s really important to only consider taking out a loan if you know you’ll be able to comfortably afford it.
- There may be a charge if you want to repay the loan early. Some lenders may not charge you at all for repaying early, but it’s not uncommon to have to pay for this if you do. The amount you have to pay is typically the same as one or two month’s interest, but you’ll likely pay more the earlier in your term you repay. This is because the interest makes up a larger proportion of the remaining balance the earlier in the term you are.
- And, as a loan is a fixed ongoing commitment, it may make it more difficult to be accepted for other loans or even a mortgage during the life of the loan. So if you borrow money now over say five years to buy a car, this could impact your ability to get a mortgage (because lenders will look at your regular outgoings) over that period.
- Let’s start with the obvious: if you need to buy something straight away – like a car so you can get to work – and you haven’t got the savings to cover the cost, then a loan will let you make the purchase immediately and spread the cost over the life of the loan.
- With a personal loan, the interest rate is usually fixed so you know how much you’ll have to repay each month, which can help you plan in advance and budget for the loan properly. Also, unlike borrowing on a credit card, you’ll have a fixed date by which you’ll pay it off in full (providing you keep to the payments).
- You don’t need to be a homeowner to get a personal loan and you don’t need to secure it against any of your assets. Whereas a homeowner loan is secured against your property, a personal loan isn’t. This means your home is very unlikely to be at risk should you fall behind on repayments.
- Personal loans can be a cost effective way to borrow. If you’re used to borrowing with a credit card or using your overdraft facility, you might be better off with a loan as the interest rates are often lower.