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The Advantages And Disadvantages Of Taking Out A Loan

Taking out a loan is a big decision. You’re likely going to be paying it off for a number of months after you receive the initial amount, so it’s a huge commitment; you’re not simply receiving a big cash injection and solving all of your financial woes in one fell swoop. As with most things in life, there are advantages and disadvantages to taking out a loan, and they may well be deal breakers either way depending on your personal situation. Here are some of the advantages and disadvantages of taking out loans, as well as when they might apply to your situation.

Advantage: loans can help you out of a tight spot

In essence, a loan is just a lender saying that you can have an amount of money now, but you’ll need to pay it back in smaller instalments over the next few months (or even years). This means that loans can be an excellent way to get out of a tight spot if you know you’re going to be financially better off after the loan. If you’re experiencing problems that you know won’t last, then a loan can be a great option for you.

Disadvantage: you’ll have to pay them back

It might sound obvious, but you’d be amazed at how many people simply forget that they will need to make loan repayments at some point in the future. A loan isn’t free money, and it’s very important to remember that; there may be dire consequences if you fail to make a loan repayment. Depending on the lender, you may even find yourself losing an asset you secured against the loan, so it’s important to be very careful.

Advantage: there are plenty of different loan durations

If a specific type of loan doesn’t appeal to you, there are bound to be other options that might be more suitable for your situation. Are you in distress and in immediate need of assistance? You should look into short term loans as a means of lifting yourself out of your predicament. Do you need long-term assistance? Many companies and lenders will give you large loans in exchange for higher interest rates.

Disadvantage: bad credit means less likelihood of a loan

Unfortunately, your credit rating is tied inextricably into whether many lenders will consider you for a loan or not. If you’ve got a poor credit rating, you’ll likely find that a lot of lenders will reject your application out of hand because they don’t believe you’ll be able to make timely repayments. This isn’t the case all the time, and there are options for those with bad credit, but this score can be a huge factor in lenders’ decision-making.

Advantage: there are different kinds of loan

Depending on your situation, you’ll find there are plenty of options when it comes to the kind of loan you want to take out. Secured loans are taken out against an asset, for example, while unsecured loans aren’t (but they usually require better credit). You might also want to look into peer-to-peer lending, credit cards, or equity loans, as all of these are great options depending on your circumstances.

Disadvantage: you’ll pay a lot of interest

Because of the way interest works, you’ll almost certainly end up paying more on a loan than you initially borrowed. This is how lenders make a profit and stay in business, so it’s an unfortunate reality of the world of loans. However, it does mean that in the end, a loan is a losing game for you, so you should only take one out if you’re really in need of the money for one reason or another.

Advantage: you can improve bad credit with loans

If lenders see that you’ve taken out a loan and then started making prompt, regular repayments, this will impress them. A bad credit score can be improved significantly by making regular repayments on loans, so once you do get approved for a loan, make sure you’re able to stick to a strict schedule in this regard. Having good credit opens all kinds of doors, so it’s a goal worth chasing.

Disadvantage: loans often have fees

While making regular repayments is important for your credit score, it’s also vital for another reason: loans frequently have late fees, penalties, and other potential hidden charges associated with them. Many lenders will try to rush you through the application process so that you can quickly apply for the loan, but be sure to thoroughly read terms and conditions so that you know about anything that could come back to bite you.

Advantage: you can consolidate debt with loans

A loan can be an excellent way to take a lot of disparate debts and combine them all into a single source. This is good because many debts you might accrue will have differing interest rates or fees. If you only have to make one repayment to a single source, then you only have a single set of statistics and potential penalties to worry about when making repayments.

Disadvantage: you might not get what you want

Depending on your personal circumstances, you may not be approved for the loan that you want. In most cases, you’ll need a specific amount of money (or an amount within a specific range), and it’s completely up to the lender whether or not you’ll be able to get that loan approved. Most of the time, if you fulfil all the criteria, you’ll be approved, but this can be ephemeral and difficult to judge depending on the lender.