The Pros and Cons of Personal Loans

In this video, I want to go over the pros and cons of getting a personal loan. I won’t be talking about payday loans or cash advances in this video, but rather you applying for a loan at a reputable lender, getting the money deposited into your bank account, and making fixed monthly payments of principal and interest throughout the term of the loan with that interest rate being in the single digits or low double digits.

So with interest rates pretty low right now on many credit products you may be wondering if now is a good time to take out a personal loan now i can’t answer that question for your specific situation but there are definitely some things that you should consider before taking out a personal loan so in this video i want to go over the pros and cons of getting a

Personal loan but right here off the bat i want to define what i’m talking about when i’m talking about a personal loan first i’m not talking about a payday loan or cash advance i don’t even consider or refer to those as personal loans those are scams and rip offs when i’m talking about a personal loan i’m talking about you applying for a loan at a reputable

Lender financial institution getting the money deposited into your bank account and then making fixed monthly typically monthly could be some other interval monthly payments of principal and interest throughout the term of the loan with that interest rate being in the single digits or low double digits that’s what i’m referring to as a personal loan throughout

This video not cash advanced loans and not payday loans also if you’re thinking about getting a personal loan you might want to check out fiona link in the description below it’s no cost it’s free it does not affect your credit score fiona basically compares interest rates and terms of personal loan lenders depending on your situation these are not loan sharks

The requirable reputable lenders check out the link to fiona in the description below if after watching this video you think getting a personal loan is right for you because there are definitely pros and there are definitely cons as well getting a personal loan is not necessarily the right move for everybody but for right now let’s dig into the pros and cons of

Personal loans starting with the pros pro number one getting a personal loan can actually increase your credit score in three ways it can hurt your credit score in three ways as well as i will talk about in the comments section of this video but for now let’s let’s focus on the three ways that getting a personal loan can actually increase your credit score number

One if you responsibly make timely payments on your personal loan that will positively impact your payment history factor of your credit score which is responsible for 35 of your credit score way number two getting a personal loan can increase your credit score is that it can reduce your credit utilization if you use your personal loan proceeds to pay down higher

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Interest credit card debt credit card utilization is important it makes about about thirty percent of your credit score so if you have a credit card right now and this is your only credit card and it has a credit limit of five thousand dollars and your balance on that card is four thousand dollars ouch that’s eighty percent utilization that’s way too high but if

You’re approved for a personal loan for three thousand dollars and use that money to pay three thousand dollars down on your credit card balance not only will you save on interest that’s accruing on your credit card but boom your utilization goes down to only 20 third way that getting a personal loan can increase your credit score is helping your credit mix factor

Which contributes to about 10 of your credit score so how the credit mix factor works is lenders generally like to see that you’ve been responsible with a variety with different forms of credit so if right now the only credit that’s been extended to you is revolving credit like credit cards then getting an installment loan like a personal loan could actually

Increase your credit mix and help your credit score out a little bit pro number two of getting a personal loan a personal loan can help you save money if you use it to pay off high interest debt i alluded to this previously with credit cards but it’s common sense if you take out a personal loan at say 10 to pay off a credit card at 20 interest that saves you money

And that’s obviously a good thing number three a personal loan can keep you from going into higher interest debt look if you’ve taken my personal finance course the money course link in the description below you know that i teach that when you’re just starting out an emergency fund is invaluable but let’s say you aren’t at that point yet you don’t have an emergency

Fund yet or you have some catastrophic event happen that completely exhausts your emergency fund what can you do well you could put that money on a credit card at a super high interest rate dig yourself a hole might be tough to get out of or you can get a personal loan which will generally have a lower interest rate pro number four a personal loan can make you

Money if you borrow at a lower interest rate than the rate of return of whatever you’re investing in it’s not a perfect analogy but it’s kind of like a mortgage on a rental property right you borrowed money you’re paying interest to the lender right but you’re also making rental income it can be the same thing with a personal loan i have borrowed money personally

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To invest in opportunities that came my way i’m not necessarily recommending that there’s always risk when it comes to investing but that risk is amplified even more when you borrow money to invest so i’m not recommending that you do this to get a personal loan to invest but it is a possible pro of personal loans they can make you money but of course they can also

Lose your money card number one just like getting a personal loan can increase your credit score in three different ways getting a personal loan can potentially hurt your credit score as well in three different ways way number one that a personal loan can hurt your credit score is that your lender will very likely pull your credit when you apply a hard inquiry

Like that can take a few points off your credit score temporarily way number two a personal loan can adversely affect your credit is that your length of credit history will go down your length of credit history accounts for about 15 percent of your credit score obviously a brand spanking new personal loan will reduce your credit history average for example right

Now the only thing on your credit report is a credit card you’ve had for 10 years your average length of credit history is 10 years add a brand new personal loan your average goes down to five years and finally way number three that a personal loan can hurt your credit is is if you miss payments on your personal loan payment history accounts for a whopping 35 of

Your credit score so if you miss payments on your personal loan your credit score will go down call number two personal loans a personal loan can cause you to spend irresponsibly it’s just part of human nature when your bank account balance has hardly anything in it you tend to be a little more careful about how you spend that’s why i personally keep very little

Cash in my checking account money comes into my checking account it’s immediately invested so i don’t see it so i don’t see this big old balance in my checking account that could cost me to spend money on things i don’t need same thing with a personal loan you get a personal loan for a few thousand bucks it’s sitting in your account you could be tempted to spend

It in ways you wouldn’t if you didn’t have as big a balance in your bank account call number three and this one’s pretty obvious but you will have to pay interest on your personal loan that is real money out of your pocket that you’re paying to rent the lender’s money this is fairly obvious i’m not going to spend any more time on this call number four fees some

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Personal loan products will charge you a fee even beyond the interest you pay on the loan this could be a non-refundable application fee it could be an origination fee on the front end it could be a prepayment penalty if you want to pay off your loan early obviously late payment fees are a thing so before you even apply for a particular personal loan product you

Want to make sure that you’ve asked the lender about all the possible fees they would charge you starting with the application fee if any so should you get a personal loan well you basically have to weigh the pros and the cons that i’ve talked about in this video and decide look is the interest i’m paying on this personal loan worth it if you’re going to use this

Personal loan to pay off higher interest credit card debt sure very well could be worth it as long as you make timely payments on that personal loan so you don’t wreck your credit score on the other hand if you’re getting a personal loan just to spend it on a vacation or a trip or decorating your home or something like that um i would probably recommend against

That when it comes to consumption i’m a big fan of delayed gratification that trip or that decor or that furniture you buy or or whatever it is will feel so much more satisfying when you worked hard for it and paid for it with your own money rather than borrowed funds and that’s a smarter financial decision as well because when you take into account interest that

Purchase will be cheaper if you just pay for it with your own money rather than borrow money of course if you do think a personal loan is right for you make sure you understand all the terms and conditions and especially because of the fees right because i’ve seen a lot of bait and switch in the personal loan space where the lender advertises a very low interest

Rate but then hits you up on the wazoo with fees kind of like what spirit airlines does with plane tickets all right folks those are the pros and cons of personal loans did i miss any let me know in the comments below also i have two videos for you on the next screen the first one is how i personally dug myself out of 50 000 of debt that i had accumulated at the

Age of 21. the other one is one of my og videos on this channel on eight ways to get out of a bad payday loan be sure to check those out and i will see you over in those videos bye you

Transcribed from video
The Pros and Cons of Personal Loans By Logan Allec