When you’re thinking of applying for an unsecured personal loan online, it’s always a good idea to weigh up the advantages and disadvantages to find out whether it is the right product for you.
Advantages of personal loans
- Spread the cost of a significant purchase safely
- Can help you manage your personal finances
- Ideal if you have struggled to save in the past
- Unsecured loans are not tied to assets
Disadvantages of personal loans
- Long-term commitment
- Good product requires a good credit score
- Certain loan types are riskier than others
- Will never get 0% interest - unlike a credit card or finance deal
Personal loans have pros and cons like all consumer credit products, so by doing research on the topic you can figure out whether it is preferable over other ways of borrowing. You can find out more about personal loans using the links below:
- How to compare personal loans
- Eligibility for personal loans
- Personal loan interest rates
- How much can I borrow?
Check out our analysis on the benefits of personal loans versus the drawbacks below.
What are the advantages of a personal loan?
There are many advantages of personal loans to consider, especially when you’re trying to weigh up whether it is the right product compared to a credit card, finance deal or overdraft. Below we’ve put together the main benefits of personal loans so you can make an informed decision.
Spread the cost of a significant purchase safely
The biggest advantage of a personal loan is that it allows you to take a large purchase such as a holiday, wedding or buying a new car and spread the cost over a longer period. This makes it much more affordable and means you won’t compromise your existing personal finances in order to afford it.
Can help you manage your personal finances
Personal loans are not always used for making significant purchases; they can also be used to manage your existing debt more effectively. This takes the form of a debt consolidation loan, where you take multiple debts accrued on credit cards, overdrafts and previous loans, for example, and lump them together into one product. The advantage here is that you could save money on interest in that you will only pay one rate, rather than multiple rates that could end up being more expensive.
Ideal if you have struggled to save in the past
If you have had issues in the past trying to save money on a monthly basis, getting a personal loan is the opposite way to do it. Rather than put money aside over the course of months and years, you’re actually setting aside an amount that you will have to pay, in order to afford something more expensive.
Unsecured loans are not tied to assets
By opting for an unsecured personal loan, you are also saving yourself the risk that is associated with a secured loan, where you have to ‘secure’ a loan against your home or other asset. It is purely based on your own credit score so there is no other collateral that is required for this type of borrowing.
What are the disadvantages of a personal loan?
Whilst there are many distinct advantages to applying for a personal loan, there can also be disadvantages, which might mean that it is not the best way to borrow for you. Take a look at the main disadvantages of a personal loan.
The biggest disadvantage to personal loans is that you have to make a long-term financial commitment. While this could be fine if you have a stable income and predict you will still be earning the same amount or more in a number of years, this could be more difficult for those with fluctuating incomes, such as a freelancer or someone who is self-employed.
Good product requires a good credit score
Another disadvantage is that getting a personal loan with a low interest rate is all based on your credit score. This means that if you have a poor or low credit score then you might not be eligible to get the best loan products available. If you have had issues with borrowing in the past or have ever missed a payment on a previous consumer credit product, it may be more difficult for you to get the loan that you want.
Certain loan types are riskier than others
While an unsecured personal loan has a certain amount of risk attached, there are other types of loans that are riskier, based on how much you have to repay and the interest rate. Short-term loans, for example, come with a very high interest rate that you will need to pay off in full and on time to ensure you don’t accrue further high interest payments or other penalties.
Will never get 0% interest
Personal loans will always have added interest that will be calculated during your application and added on top of your monthly repayments, but this will never be at 0%, unlike other consumer credit products like credit cards. This is a disadvantage when comparing products as it might be preferable for you to go down the route of a credit card or finance deal that is fixed at 0%, as long as your credit score is good enough to make you eligible.
Should I get a personal loan?
With these advantages and disadvantages in mind, this should give you plenty to think about in terms of getting a personal loan and whether it is the right option for you.
If you already have a loan amount and loan period in mind, you can start to search for loans using our free MoneyMatcher tool and then compare it against other types of borrowing. Searching for products will usually be based on your credit score initially, so it’s worth checking your credit report first and taking steps to improve it if possible.
Finding the right loan for you can seem daunting at first, but with the ability to compare loans online using comparison sites and free eligibility tools such as MoneyMatcher, it can actually be made much easier. Start your journey using the link below.