If you are in a position where you find yourself needing money that you don’t actually have, then a loan may seem like the only option. But, even when you are in a tricky situation, it is important that you never dive into a loan application without doing your research.
For many people, a big part of the research process is looking at the pros and cons of whatever it is that you are considering. So, before you apply for a loan, you may be interested in finding out more about the pros and cons of borrowing money in the form of a loan.
Well, we’ve got you covered! In this guide, we’ve covered all the biggest pros and cons about taking out a loan. So before you apply for a loan, check out this guide to determine if it is the right choice for you!
What Is A Loan?
Before we dive into the pros and cons, let’s take a super quick look at what a loan is. A loan is essentially the act of borrowing money, property, or any other material goods in return for future repayment of the amount borrowed with interest added. Loans can come in a variety of different forms.
There are lots of different types of loans, and loans for different things. For example, student loans are money specifically borrowed to pay for tuition fees.
Likewise, your mortgage is a loan that is borrowed to pay for property. Some loans are secured with an asset put up as collateral, and others are unsecured loans which are high risk for the bank because they have to trust your creditworthiness.
But no matter what type of loan you apply for, ultimately all loans are fundamentally the same. They consist of you borrowing money on the basis that you will repay it, plus extra in interest, at a later date.
It is critical that you are aware of this before you apply for a loan because taking out a loan is a big step. Now, let’s take a look at the pros and cons associated with this.
Pros Of Having A Loan
First, let’s take a look at some of the benefits of taking out a loan. As you would expect, there are quite a lot of pros to loans, and that is why so many people apply for them. So, let’s look at them in more detail.
One of the biggest advantages to a loan is that they are incredibly convenient. Loans are really easy to apply for and straightforward to understand. All of this simply makes them more convenient to those who need money quickly.
With some loans, all you need to do is fill out an online application form and you can get the money in your account the same day. It really is that convenient.
Even with loans that take a longer time due to the large amount of money you will need to borrow, there is still a convenience with loans that you do not get from other methods of generating funds.
This is what drives a lot of people to apply for loans.
Bank loans also offer a lot more flexibility than other types of fundraising.
For example, there are tons of different types of loans out there for different purposes, so you have a very good chance of successfully applying for and obtaining a loan.
The flexibility of loans is also great as loans are now achievable for most people. Even people who have a poor credit history.
With secured, unsecured, and guarantor loans as just a few examples, there are lots of different types of loans out there, and lots of different lenders offering them. So one of the biggest benefits of loans is definitely their flexibility.
Access Large Lump Sum
Undoubtedly, one of the best things about a loan is that it allows you to access a large lump sum of money.
There are very few circumstances where you may find yourself able to have such a large sum of money at once, and if you were to fundraise or save towards the same figure, it would take a considerable amount of time.
Whereas a loan allows you to access that money quickly and all at once.
There are, of course, a number of drawbacks to loans, but there is no denying that the fact that they allow you to access a large lump sum at once is a massive attraction.
There are loads of people that can benefit from accessing such a large lump sum. Often, you will be able to get the money quickly too (depending on the loan that you apply for).
Cons Of Having A Loan
However, there are also a lot of negatives associated with loans. Generally, loans are often viewed as a bad thing, so let’s take a look at some of the reasons behind this view.
High Interest Rates
One of the biggest drawbacks of having a loan is the high interest rates associated with them. Just like any form of credit, when you take out a loan, you borrow that money on the basis that you will repay it, plus interest, in the future.
That interest can often increase the amount that you are having to repay significantly.
Not only are the interest rates high, but they are also higher than a number of other forms of credit. For example, the interest rate on loans tends to be significantly higher than credit cards.
This means that you will end up having to pay a lot of money on top of what you initially borrowed.
Impact On Credit Score
Another great drawback of loans is the impact that they have on your credit score.
When you take out a loan it will have an impact on your credit score, and what you do next will impact whether it has a positive or negative impact.
Even if you make your payments on time, your credit score will still initially take a hit when you take out the loan. If you fail to make your repayments on time, then this can have a detrimental impact on your credit score. This can affect your eligibility for any future credit applications.
Additional Monthly Payment
One thing that many people don’t consider when they take out a loan is that they are adding another monthly payment to their outgoings.
It is the monthly payments that can really bog you down, so adding another monthly expense isn’t always ideal.
When you take out a loan, and sign a credit agreement, you will agree to a monthly minimum repayment. So bear this in mind before you take out a loan.
Increased Amount Of Debt
Finally, it is worth noting something that is likely obvious. That is that taking out a loan is increasing the amount of debt that you have.
Having debt isn’t ideal, and it is easy to get bogged down with it. It can also impact any future credit applications, so this is a major drawback of taking out a loan.
In short, there are lots of pros and cons to applying for a loan. Before you apply for a loan, it is very important that you fully understand exactly what you are applying for, and how this could impact your life.
In this guide, we have covered some of the biggest pros and cons of taking out a loan to help you decide if it is the right option for you.
Thanks for reading!