Advantages and Disadvantages of Personal Loans


When people see the loan coming around the corner, most of them freak out. However, right now, in the 21st century, we get more used to the thing called “payday” or “personal” loans, when a lender offers a small amount of money in return for some part of your next paycheck. 

Loans are not as scary and big as they were before; banking has moved to an online space and doesn’t require as much paperwork and patience, as it did before. 

Even the big financial operations are done without a previous appointment, in a matter of minutes, not hours. 

If you need extra cash for medical expenses, covering a house payment, or financing a car repair, a personal loan is a very attractive option. The interest rate will hinge on your credit score, income level, and debt-to-income ratio. 

Consider the pros and cons of personal loans before you submit an application; even the sun has spots, and personal loans, surely, have their pitfalls.

What Is a Personal Loan?

A personal loan is an installment loan that gives you a fixed amount of money (between $1,000 and $50,000) in one lump sum. You don’t have to use collateral to secure funds, and the repayment terms are pretty flexible. 

You can get a personal loan (as any other micro loan) in different places such as at a Dave app. It’s an application designed to help you control your expenses and pursue financial literacy. 

The Dave app review also says that you can get financial advances without interest fees in the amount of up to $250. According to Moody’s Analytics chief economist Mark Zandi, personal loans “have been growing like a weed”. 

Over five years, from 2013 to 2018, thanks to the success of fintech lending products, American consumers have turned their eyes to apps, because of the easy application process they offer. 

According to the studies, the share of total unsecured personal loan balances has increased from 5% to 38% for fintech applications.

Pros of Personal Loans

Many people would choose personal loans over other lending types. Here’s the list of benefits, explaining, why personal loans will not lose popularity soon:

  • you get the loan payment all at once — which is helpful if you need to make a big purchase or consolidate debt. Many loan providers don’t think of providing the same kind of service, because making a few separate payments gives them a chance to manipulate an interest rate;
  • the speed of funding is impeccable — personal loans are getting approved fast because the lenders spend less time on paperwork. Some personal loan lenders can deposit the loan proceeds to your bank account as soon as the next business day;
  • no need for collateral — it means you don’t have to offer your apartment or a car as a guarantee of proper repayment. However, if you fail to return the money on time, you’ll face different kinds of  financial and credit consequences, the most significant impact will be made on your credit history;
  • interest rates are lower — personal loans certainly come with better rates, than credit card checks. Consumers with excellent credit history can qualify for personal loan rates of around 10.3 percent to 12.5 percent;
  • you may use it to your advantage — without specifying the exact purpose of your request for a loan. Personal loans don’t put a frame on your expenses, demanding that you can only spend money for the purpose you suggested;
  • they are much easier to manage — due to the fixed-rate monthly payments, personal loans don’t cause much trouble even for people who fail to plan their budget. It’s certainly a better choice than balancing between several credit cards with different interest rates and payment dates;
  • flexible loan terms — unlike short-term loans with terrifying interest rates, personal loans can extend from two to ten years (depending on the lender).

As you may see, the most attractive feature personal loans have is their flexibility. You can choose a repayment amount, and dates, and even qualify to lower your interest rates. You can also extend the repayment period, which is pretty good, in case you’re short on cash.

Cons of Personal Loans

We’ve talked so much about the benefits of personal loans, that you may wonder, “What can go wrong?” 

As always, there are some disadvantages to consider, and you should be careful to secure yourself from trouble. Remember, that dealing with a financial crisis is very tough, and it’s better to prevent it than to face it. 

Here’s the list of the “not-so-good” sides of personal loans. Read them all carefully:

  • some interest rates can be higher than alternatives — it’s especially true for people with a bad credit history. You’ll only get a good rate if you didn’t have problems with lenders before;
  • more strict requirements — some lenders have a whole bunch of factors to consider before approving your application. Even though the funding process is fast, once they find something they don’t like, they will probably reject your request;
  • high penalties — remember we mentioned the financial consequences in case you fail to repay? That’s one of them! Some loans come with origination fees of 1 percent to 6 percent of the loan amount. It’s one of the pitfalls to chase before signing an agreement; plus, be aware of the lenders, who charge prepayment penalties if you pay the balance off before the end of your loan term;
  • drowning in a debt — watch out for the personal loans, offering to consolidate your debt! Sometimes these are traps for inattentive consumers, who fail to repay and continue to collect more loans. One day you can wake up, and realize you have no money left for savings, and you have no friends because you owe them all!

The Bottom Line

Whether you decide to apply for a personal loan or not, be careful and don’t break the law. 

Trust only reliable lenders; evaluate your situation once more, and think carefully, if a personal loan is the only accessible solution. 

Be the boss of your finances, and don’t hesitate to find an alternative. Remember, that the only person responsible for your credit history is YOU!


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