Benefits And Disadvantages Of Personal Loans That You Should Know About


Personal loans can be great but that’s not always the case all the time. There are legitimate concerns regarding personal loans in some cases. We have pooled together a pros and cons guide for personal loans for you.

When done the right way, a personal loan can help you consolidate high-interest debt, pay for major expenses such as a home renovation or for a personal necessity such as a wedding. You can also use a personal loan for your children’s kindergarten fees. They don’t pose a risk to your property or assets either.

The interest rate on a personal loan, like other types of loans, depends on your income and the debt-to-income ratio apart from the most important factor – your credit score. In worst case scenarios, borrowers even fall prey to loan shark scams.

Consequently, personal loans are not for everyone. Let’s figure out whether they are the right choice for you or not.

The Basics Of A Personal Loan

A personal loan generally ranges between $500 and $50,000, or six times of your monthly income. It’s given as a lump sum and it does not have a fixed purpose.

A personal loan is an unsecured installment loan. An unsecured loan means that you don’t have to back the amount with anything such as personal property or assets to guarantee repayment in the case of a default.

The repayment terms range from 3 to 36 months in most cases.

The best thing about a personal loan is that it is a general-purpose loan. In other cases, such as a home renovation loan or a business loan, you have to get it passed with the help of a third party or in some way that limits the usage of the money.

That doesn’t apply to a personal loan, though some lenders might impose certain limitations on what you can use the money for.


Personal loans are processed pretty much the same way you would expect any other loan to be processed. Applying for a personal loan is quite similar to applying for a credit card.

For example, an application will entail entering your personal and financial information. You will also need to tell the bank the amount you seek. A credit check is done before any personal loan is approved. A personal loan might lower your credit score for a while.

Usually, lenders require a mid-600 credit score for personal loans. If you fit their criteria and your financial information is sound, the lender will approve the loan and set the term, interest rate, and the total loan amount along with the terms of the loan.

The interest rate remains the same throughout a personal loan’s term. The amount will be received in a lump sum after approval and you will start to repay monthly installments immediately.

What Are The Benefits Of A Personal Loan?

Now, let’s have a look at the advantages or benefits of a personal loan. How can personal loans help you in times of need?

1. General-purpose nature

Personal loans are pretty flexible and versatile. The money can be used for virtually anything. Unlike many other loans, such as a car loan which can only be used to buy a vehicle, you can use the money received as part of a personal loan for any need whatsoever – at least in most cases.

This makes them excellent choices for some necessities such as medical expenses or debt consolidation.

Bottom line is that a personal loan allows you to finance a big expense without being limited to how and where you spend the loan money.

2. Higher borrowing limits and lower interest rates

Personal loans often come with higher borrowing limits and lower interest rates relative to credit cards. Whereas the average credit card rate is more than 25%, the average personal loan interest rate starts from 12%.

If you have a great credit score then you are eligible for some even better deals ranging from 6% to 8% interest! No credit card can beat that.

Personal loans will also prevent you from falling into credit card debt. Many borrowers often turn to personal loans in order to get out of their credit card debt.

3. Easier manageability

Is your multi-channel credit getting out of control? Are you finding it difficult to manage your debt? Well, some people take a personal loan to consolidate their existing debt. They pay off the remaining installments with the personal loan while paying a single, hopefully, low-interest loan installment each month.

A personal loan is definitely much more manageable than multiple credit cards all with their own rates and due dates.

Streamlining your debt is easy if you qualify for a personal loan at a lower interest rate than credit cards.

4. No collateral required

Most personal loans are unsecured. This means that they don’t require collateral such as property or assets to get approved. Putting your home or car as collateral to back your loan isn’t necessary in the case of personal loans.

There will indeed be financial consequences that you should avoid at all costs but you won’t lose any property if you fail to repay the loan as stipulated in the agreement with the lender.

What Are The Disadvantages Of A Personal Loan?


Personal loans aren’t just full of advantages.

In some cases, they might actually be a worse deal for you. Let’s see what are some of the key disadvantages of personal loans.

1. The higher interest rate in some cases

Unfortunately, borrowers with a poor credit score won’t find the interest rates in most personal loans to be particularly favorable. You might end up paying a higher interest rate than credit cards if your credit score is poor. Sometimes, the bank might not even approve your personal loan. 

An alternative, in this case, could be the secured home equity loan or a home equity line of credit. The former is an installment loan whereas the latter is pretty much like a credit card. The obvious downside of this type of loan, or any other secured loan, is that you risk foreclosure of your home as it’s used as collateral.

2. High fees or penalties

Not all personal loans are equal. Some come with various penalties and fees. Always read the fine print.

These fees and penalties differ from lender to lender. It’s best to read up in-depth regarding the loan in question.

The good news is that personal loans from private financial institutions are closely monitored by the Ministry of Law. For example, they are not allowed to charge a late interest rate of more than 4%. The late interest can only be charged on the amount that is late.

Let’s put in some figures.

Mr Tan has taken a loan of $10,000 and he fails to pay the first installment of $2,000. The licensed moneylender may only charge the late interest on the first installment of $2,000, and not on the remaining $8,000.

3. Increased debt

Personal loans are great if you wish to consolidate your debt, as we saw in the previous section. But the opposite is also true. Heavy spenders might look at a personal loan as a means of free money that they can easily repay in monthly installments.

It’s generally a bad idea to acquire capital just because you can. In the case of some emergency, you might end up with an out-of-control debt that began with a seemingly harmless personal loan.

Nobody has foreseen the future. So unless it’s for something absolutely critical that has no better alternative, don’t go for a personal loan.

4. Negative impact on credit score

Of course, borrowing money from a lender can have a negative impact on one’s credit score. This isn’t just about a personal loan, but loans in general.

Always avoid personal loans if you can help it when your credit score is already poor.

It will only help your credit score if you make punctual repayments, proving to banks that you are responsible and that you have healthy finances.

5. More rigid repayments than credit cards

Credit cards allow you to repay in smaller amounts than personal loans. They also don’t have a deadline (but a compounding interest is, in many ways, worse than a normal interest that has a deadline).

With personal loans, you have to make monthly repayments and completely pay off the loan by the end of the term.

In short, please think and budget carefully before applying for an instant personal loan.

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