When you’re in financial trouble, it can feel like there’s no way out. No matter what you try – working harder, selling things you’re not using anymore, reaching out to friends and family – the mountain of debt just doesn’t seem to shrink in size, and things are starting to look hopeless. However, you should never give up hope; there are always options when you’re struggling for money.
One of these options is to take out a loan, but it’s not as simple as just wanting a loan and getting one. There are procedures you need to go through, and there are pros and cons to getting a loan that might make you reconsider your decision. We think it’s a great idea in certain circumstances, but you need to make that choice for yourself. Here are the pros and cons of taking out a loan to help you make up your mind.
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Pro: There are different kinds of loans available
Loans aren’t a “one size fits all” solution. There are plenty of different types of loan out there, so you can apply for the one that best fits your situation. Do you need a big injection of cash right now that you’ll be able to pay back near enough immediately? It’s a good idea to apply for short term loans in that case. Are you a homeowner looking to carry out a big DIY project? Second mortgage loans might be the option for you. No matter what sort of financing you need, it’s a guarantee that there will be a loan out there for you.
Con: You’ll have to pay it back
We know this might sound obvious, but it’s never a good idea to treat loans as free money. Eventually, you’ll need to start repaying your loan, so loans are a temporary reprieve rather than a catch-all solution to your financial worries. Of course, most lenders are flexible in terms of repayment plans, and they’re usually open to negotiation, so if you do find yourself struggling with repayment, you’ve always got options in that regard. However, getting that sudden cash injection can feel more liberating than it actually is, so be wary.
Pro: You can consolidate existing debts
You can use loans to help you collect all of your existing debts in one place. To do this, simply take out the loan, then use it to pay off debts from various different sources. Of course, this won’t wipe out the debts, but it will streamline them so that the expenses are all coming out of your account in a single place and at a single time. This could also improve your credit rating by demonstrating that you’re able to make repayments and even wipe out debt, so the benefits are numerous. If you find yourself tearing your hair out because loans are leaving your account at different times, consolidation could be the answer.
Con: Not everyone can get a loan
In order to be approved for a loan with most lenders, you’ll need to go through a reasonably rigorous application process that examines your finances to make sure you’ll be able to make repayments. This is, of course, a mechanism to protect the lender, but it’s also in place to protect you; lenders don’t want you to borrow money that you’re then incapable of paying back, thus placing you in even greater financial trouble. Of course, this means that you might struggle to be accepted for a loan if your circumstances are dire, which somewhat defeats the point of taking out the loan in the first place.
Pro: Lower interest rates than credit cards
Any kind of loan carries interest rates with it. This is how banks and lenders make profit on loans, but it means you’ll be paying more than you initially borrowed. That’s unavoidable, unfortunately, but you can control the interest rate to a certain extent. Personal loans have a lower interest rate than credit cards do, making them a much more attractive proposition for long-term repayment plans. No matter where you borrow from or what form your borrowing takes, you’re going to be dealing with interest rates, so it’s best to keep them as low as possible.
Con: Hidden fees could be involved
Many lenders will incorporate fees into their loans that aren’t necessarily immediately apparent when you’re applying. These fees are above and beyond the standard interest rate and will differ from provider to provider, so it’s very important to read the terms of your loan thoroughly before you commit to it. Sometimes, these fees can be as high as 6% of the total loan balance, so they’re not insignificant. There are also other fees lenders can charge, like early repayment fees, which can come back to bite you if you find yourself in a better financial position than you’d expected.
It’s up to you
In the end, while we can outline the pros and cons of taking out a personal loan, the final decision is in your hands. Only you can know whether getting a loan is the right choice for you. If you’re looking for a cash injection and know you’ll be able to steadily repay that amount over time, then a loan is a great idea. If, however, you’re in serious financial trouble, then taking out a loan could exacerbate the problem rather than alleviating it. Think carefully about your finances, examine your expenditures and income, and make your decision based on data.