The pros and cons of taking out a personal loan
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Whether you’re planning for a wedding, booking a holiday, or you need to consolidate debt, a personal loan can be a useful asset to help you accomplish your goals.
However, like with any loan, it is important you examine all the pros and cons before applying.
Pros:
1. Consolidate existing debt
Debt can be a debilitating state to be in, and as the bills pile up so does your stress. If you, like many other Australians, have one or more sources of debt a personal loan can be a quick and easy way to consolidate some of those scarier bills and get you back on your feet. Personal loan interest is typically much lower than that of a credit card, for example. If you’re paying off one or more credit card bills with a personal loan this will cost you less in the long run.
2. Buy now, worry later
Maybe you’re building a nursery, or you’re in desperate need of a holiday? A personal loan is an easy way to help you purchase big ticket items now, and pay off later.
3. Quick and flexible
Compared to a line of credit loan, a personal loan is much easier to apply for. You will hear back quickly as to whether you’ve been approved, and the lenders are typically more flexible with what you want to spend the money on.
Cons:
1. High interest rates
Just because personal loans carry lower interest rates, doesn’t mean this doesn’t add up. If you take out a loan for $10,000 and pay this back over 3 years at a rate of 11.99 per cent (not including upfront or monthly fees), you will end up paying $11,995 by the end of the loan.
2. No part payments
If you decide you want to pay the personal loan off immediately you will typically have to pay a break fee. These fees can be quite high, as the banks need to make up for the lost interest they would have accumulated from you over the life of the loan.
3. Transfer of debt
A personal loan is a competitive option if you need to consolidate debt, however it is not a permanent fix. You have simply transferred your debt from one, or multiple sources to your personal loan, and you will still be paying interest on this.