With the help of a personal loan, you can pay your small outstanding debts in a short time and reduce the overall interest rate. However, it’s best to be aware of the pros and cons.
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As the owner of a small business, you might have accumulated more debt over the last few months than you would like. What’s more, a personal loan might work better for you than a business loan. It’s one of the best financing options, after all. A personal loan will allow you to handle urgent business expenses and pay for emergency personal expenses. It might also provide you with enough money for some small luxuries you have been wanting.
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If it seems like we are trying to boast about the benefits of a personal loan, that’s not our intention. In a previous blog post we talked about how a personal loan is for different types of borrowers. Read this post to find out more about whether a personal loan is right for you or not.
To recap briefly, it works best for covering large expenses you need to pay for immediately. However, you need to ensure that you have the monetary means to pay back the loan according to the lender’s terms.
What Are the Pros and Cons of a Personal Loan?
Let’s look at the pros and cons of a personal loan:
You Get Quick Approval with a Personal Loan
Nowadays, online banks and lenders are giving you the option to get your loan approved within an hour. Such loans usually have a limit of between $300 and $10,000. Lenders generally have three categories: small, medium, and large. The first is unsecured, and the latter two are secured.
As long as you are 18 or older, have an online banking setup, and are a permanent citizen in Australia, you won’t have any trouble with your loan application.
It Helps You Build Credit
After taking out a personal loan, you have to make regular monthly payments toward your outstanding balance. Your lender keeps a record of every payment and reports it to the credit bureaus. These include TransUnion, Experian, and Equifax.
The more on-time your payments are, the more your credit score will improve. Your credit history makes up 35% of your FICO score. This also means your credit score will suffer if you make a late payment.
A Personal Loan Allows You to Make Immediate Purchases
Once your lender approves your application for a personal loan, they hand you a lump-sum amount. You can use this money however you see fit. You can make big purchases and then pay for them slowly based on the terms of your personal loan, for instance. However, you should avoid using the loan for luxury purchases that you want just because everyone is buying those things.
It Allows You to Consolidate Your Debt
If you have multiple debts that are getting harder to manage due to larger payments and increasing interest rates, perhaps taking out a personal loan is the answer to getting rid of them. Alternatively, you can talk to your lenders and ask if you can make payments more frequently. This way, not only will you be able to pay down your debt in a shorter time but also improve your credit score, too.
Small Loans Don’t Require Collateral
Every lender offers different loan limits. If your request for the loan amount falls into the “small” category, you won’t need to put up collateral.
A Personal Loan Carries High Interest Charges
Personal loan lenders don’t pay much attention to your credit score. Nonetheless, that doesn’t mean that you will necessarily get a loan easily. Since personal loans are also available on bad credit, these lenders charge a high interest rate.
There Are Penalties Involved
Some lenders charge an application fee that covers the loan’s processing cost. You will also be hit with a penalty if you make a late payment. Many competitive lenders don’t do this. Instead, they offer a grace period so borrowers can make arrangements.
Large Loans Require Collateral
A loan amount above $2,000 will require collateral. So keep in mind that if you fail to pay the loan the lender will take possession of the asset you put up as collateral.
It Could Cause Credit Damage
One single late payment, and your lender will report it to the credit bureau. So even if you worked painstakingly to improve your credit score, it will go back down.
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Is a Personal Loan Right for Me?
You will benefit from a personal loan under the following circumstances:
- Your credit score is in the “good” range. This will help you lock in a low interest rate.
- You have enough room in your budget to make the monthly payments.
- You are looking for a quick way to consolidate your high-interest debts so you can buy a house in the future.
- Your DTI (debt-to-income) ratio is less than 36%.
- You don’t qualify for a credit card with a 0% annual percentage rate (APR).
- You are planning a home renovation project that will increase your property’s value.
Use the information in this post to help you make a decision about whether a personal loan is right for you and your small business.