Personal loans are viable ways to obtain the money you need to pay your bills, make a necessary purchase, improve or repair an item in your home and more. This type of loan has both pros and cons, however, and it is important to understand the details of each prior to signing any loan documents. Personal loans are also written in various forms, some of which are financially friendlier to you than others.
Secured and unsecured loans both qualify as personal loans. Many people think of a secured loan as involving a home and a mortgage. While this is often accurate, secured loans are also written as personal loans using different types of terms and conditions.
A secured personal loan uses collateral to help guarantee repayment. Collateral is usually related to the purpose of the loan. For example, a personal car loan uses the car title as collateral.
Collateral does not have to relate to the loan purpose, however, and acceptance of various forms of collateral is largely dependent on lender terms and policies.
The pros and cons of personal loans are therefore related to the type of loan written, the collateral used and the risks/costs of the loan to the borrower. Personal loans, both secured and unsecured, are largely approved based both on your credit score and verifiable income level.
The pros and cons of personal loans are as follows:
Pros of Personal Loans
- Personal loans offer fast cash to borrowers in need.
- Loan amounts are potentially flexible based on your credit rating, income and collateral used.
- Secured loans tend to charge lower interest rates (APRs).
- Personal loans are available through banks, credit unions and other online lenders.
- Payday loans are available for the most urgent borrowing needs.
- Personal loans through credit unions have friendly repayment terms and low APRs.
- Using collateral helps overcome poor credit scores and/or lower income.
Cons of Personal Loans
- Using collateral to secure a personal loan puts the collateral used at risk of forfeiture.
- APRs on unsecured loans are usually higher.
- Unsecured loans are usually not granted to borrowers with low credit scores/income.
- Some personal loans charge exorbitantly high APRs.
- Thorough research is required to avoid committing to inflexible/unfriendly loan terms.
- Some loan companies charge additional hidden fees wrapped into the total loan amount.
- The best APRs are reserved for borrowers with excellent credit.