It is important to understand the advantages and disadvantages of taking a loan, with a loan you need to be sure you can pay back the full amount you’ve agreed each month, as there isn’t an option to pay less or a pay a ‘minimum’ like there is with revolving credit.
Personal loans: advantages and disadvantages
Advantages
- Anyone over the age of 18 can access one, as you don’t need an asset to secure it against
- These types of loans are pretty versatile in their purpose, as you can use the money for almost anything. Always make sure that you are borrowing what you can afford to pay back
- You can have flexible time periods to repay, this will vary depending on the amount you borrow
- Certain providers offer payment holidays, which gives you a break from repaying your monthly repayments. You will still be charged interest during this period and it will take longer for you to pay it back, so always think carefully about taking up these offers
- You can usually pay them back early without any penalties if your budget changes. If you took out an unsecured loan after 1st February 2011 for £8000 or less, it can be paid off earlier without early repayment charges
- They pose less risk than secured loans, as your assets cannot be reclaimed if the debt isn’t repaid (this may change if a failure to pay results in a CCJ)
- They are usually very quick for not only a decision but the money being transferred to your account (anywhere from within 15 minutes to the end of the next working day)
Disadvantages
- You aren’t offered the long repayment times some secured loans provide, which can be up to 25 years.
- You can usually only borrow up to £15,000, which may not be enough money for certain home improvements or car purchases.
- The interest charges can typically be more expensive than secured loans.
- You need a strong credit score to access the best interest rates and deals.
- Your monthly payment figure is fixed, so you don’t have the flexibility to pay smaller amounts one month (compared to credit cards for example). This is the case even if you pay more off one month.
Secured loans: advantages and disadvantages
Advantages
- You can often borrow larger amounts of money than with an unsecured loan
- You can also take longer to pay secured loans back, up to 30 years
- Interest rates are often a lot cheaper than personal loans because the risk of retrieving the money by the lender is lessened by the asset providing security
- You don’t always need an exemplary credit score, due to the assets offsetting the risk
Disadvantages
- These are only available to homeowners with enough equity – and your home can be at risk if you don’t keep up with your repayments. This is a big reason why you must be 100% sure you can afford to stick to the payment plan
- You will usually be charged early repayment charges if you pay the loan back early. This is also applicable if you transfer the loan to another provider
- You may have variable interest rates which fluctuate, so the cost of borrowing may go up over time
- As with unsecured loans, your monthly payment figure is fixed. This means lacking the flexibility to pay smaller amounts one month which is the case with credit cards