The Pros and Cons of Personal Loans

If you’re thinking about borrowing money, a credit card shouldn’t be your default option. Although credit cards have specific advantages (i.e. rewards programs, emergency funds, etc.), taking out a personal loan is an option that you don’t want to ignore. Ranging anywhere from $500 - $35,000, personal loans come with a fixed interest rate and repayment term. The amount you borrow will depend on the lender, your income and your credit history.

The demand for personal loans is rising amongst Canadians who are interested in consolidating their debt and rebuilding their credit score. If you’re applying for a personal loan, here are some things you should keep in mind:

Pros of Personal Loans:

1. Fixed Term and Fixed Rate

Personal loans have a fixed term, which means that you know when the debt has to be paid off. Compared to credit cards, which can take decades to pay off, personal loans typically take no longer than 5 years to repay. Alongside this, your payment and interest rate on a personal loan stays the same over the entire course of the loan period – this means no payment increase or added fees.

2. Debt Consolidation

High interest rates are one of the biggest reasons why people stay in debt for a long time. Consolidating your debt with your personal loan will help simplify your financial life because you’ll only be required to pay one bill instead of several. Additionally, your overall monthly payments will be reduced, which means more money saved for the future.

3. Building Credit

Consolidating your debt and paying off all of your old credit balances will give you a fresh start at managing your finances and building up your credit score. Making regular payments on one loan can boost your credit by lowering your utilization ratio, and because you’ll only have one payment to keep track of, you’ll be more organized and more likely to make that payment on time.

Cons of Personal Loans:

1. Your Budget

Personal loans provide a great opportunity for you to rebuild your credit and pay off debt, but if you can’t afford to budget for monthly payments, you could dig yourself into an even deeper hole. Using your credit cards once you’ve paid them off with a loan will put you in a financial mess, and it will take you a long time to pay everything off.

2. Small Debt

If you have very little debt and decide to take out a personal loan to pay it off, be careful. Using a personal loan to consolidate a small amount of debt might not save you enough in the long run to make it worthwhile.

3. High Monthly Payments

The fixed monthly payment amount on a personal loan depends on how much you’re borrowing, the interest rate, and the fixed term. Often times, personal loan payments are a lot lower than credit card payments, however sometimes they can be higher.

Personal loans can be a quick source of cash, and they typically have rates a lot lower than credit cards. If you want to get out of debt quickly, and you’ve done your research, a personal loan is a great option.