Personal loans are currently the most popular type of debt in the world. Although the type of loan is not particularly new, the fact that most banks and other private lenders have reduced the approval requirements have made its popularity spike. However, as attractive as these deals may be, they are still long-term financial agreements that can give lasting negative effects on your permanent financial record, especially if you do not know what you’re getting yourself into.
This having been said, there are several advantages and disadvantages that you must take into consideration before submitting a loan request for a personal loan. Here is what you need to know in order to avoid any issues:
Know your term and conditions
The most important thing to do before applying for a personal loan is to look at what kind of terms and condition the bank is usually offering. Once you find an offer that suits you, go through the agreement that you have to sign and take note of the following things:
- The term of the loan – Make sure that you are aware of the loan’s term, at all times;
- The type of loan – Establish if the loan is secured or unsecured. If it is secured, look at what collateral you must offer and at the circumstances under which the lender will be able to take possession of your property;
- The interest rate – Determine if the loan has a variable interest rate or a fixed one. Loans that have variable interest rates can become very expensive during times of financial crisis. This is due to the fact that the monthly repayments that you will have to make may grow with time, making the debt more expensive;
Be prepared for the long-term financial stress
Regardless if you are applying for a secured or unsecured loan, not repaying it on time can have serious consequences, particularly when it comes to what deals you will get in the future. Look at what the monthly payments for the loan will be and plan accordingly. If possible, try to always have the equivalent of two monthly payments in an account, so that you will be able to stay on track, at least for a while, if you are laid off from work.
Generally speaking, if you are unable to make your monthly payments on time and you have taken out a secured loan, you may lose your home or your car, depending on which one you offered as a guarantee.
Furthermore, even if you have applied for an unsecured loan and do not repay it on time, your credit rating will drop. This will lead to two things:
- It will increase the chance that you will get less advantageous deals in the future, regardless of what lender you go to;
- The bank or lender that you have taken the loan from may refuse to give you other loans in the future or at least until you prove that you are able to properly administer your finances;
Build up your credit rating in order to avoid any issues
In the end, it all boils down to what terms and conditions you are offered by the bank, and these depend on what your credit rating is. If you have a good financial track record, the lenders that you get personal loans from will be more inclined to look for a mutually advantageous solution if your income drops. This is the case even when it comes to secured loans. Keep in mind that most lenders would rather get their money back than take possession of your property.