The Pros and Cons of Personal Loans

About Today's  Author:  Dona Collins is a personal finance specialist with a major focus is helping people use financial tools to gain ultimate financial freedom.

Life inevitably hits us with unexpected money problems. Your car or a major appliance breaks, or you hit some other financial snag that you were not counting on. Personal loans can be a great way to quickly get your hands on some cash when you need it. Even if you do not have money problems, there are other advantages to getting a personal loan. However, any time you take on debt you have to weigh the advantages and disadvantages.

You Do Not Need Collateral

You can get an unsecured personal loan without putting your home or any of your other assets at risk. Lenders may charge you a slightly higher interest rate for loans that do not require collateral, but at least you have the peace of mind that if you have trouble making the payments, the lender will not try to take anything that you own. On the other hand, if you do use collateral to secure the loan, you will get a much lower interest rate.

Pay off Credit Card Debt

Credits cards typically come with far higher interest rates than personal loans. If you can find the right loan terms, you can pay off your credit cards and only have to make one monthly loan payment, plus you save on interest. The only downside to this is that you have to stop using your credits or you will make your debt problem worse. Even though you should not use your cards, it is a good idea to keep the accounts open with no balances because it helps your credit.

It Helps Your Credit

Credit bureaus look at the kinds of debt you have. Typically, they like to see a mixture of credit cards and loans. Personal loans are also often harder to get than credit cards, so the bureaus put a little more emphasis on a good loan repayment history when they calculate your credits scores. Once you have a personal loan though, you may not be able to be approved for credit elsewhere until you have repaid a good portion of the loan.

Applying is Confidential

Borrowing money from family and friends can be stressful, especially if they start asking nosy questions about your personal life. Many people would rather deal with a professional who works for a bank rather than explain their personal finances to a family member or friend. Additionally, once you get the loan, the bank will not ask you anymore questions unless you fall behind on making your payments.

The decision whether or not take out a personal loan really depends on your situation. In many cases, the pros outweigh the cons as long as you make your loan payments on time and do not go too far into debt. Determine how much you can responsibly afford to borrow before you take out a personal loan and it will be much easier to work the loan payment into you budget. Borrow only as much as you need and a personal loan can be a big help when you need it the most.