Pros And Cons Of Personal Loans – Forbes Advisor Canada

Personal loans can be extremely advantageous under the right circumstances. Personal loans may be beneficial because they can:

1. Help Borrowers Build Credit

Taking out a personal loan requires making regular, monthly payments toward the outstanding balance. Lenders typically report your payment record to one of two major credit bureaus in Canada—Equifax and TransUnion.

If you consistently make on-time payments, this can help increase your credit score. That’s because your payment history accounts for 35% of your FICO credit score. (Your FICO score predicts how likely you are to pay back a credit obligation. The higher the score, the lower the risk to the lender.) This also means you can damage your score if you make late payments or default, making it harder to access credit in the future.

2. Let Borrowers Pay for Purchases Over Time

Lenders disburse personal loans as a lump-sum upfront that you can use to make a purchase or pay off another debt. This enables borrowers to make large purchases and then pay for them over time, without saving money in advance. While this can be a good strategy for necessary purchases, it may become dangerous if you rely on loans to go on vacation or cover other discretionary spending.

3. Make It Easy to Consolidate Debt

Debt consolidation loans let borrowers streamline their finances by paying off individual loans and credit card balances with a single personal loan. Not only does this reduce the number of payments you have to remember each month, but it may also result in a lower overall interest rate if your credit score has improved since taking out your other loans.

Some lenders specialize in debt consolidation and will directly pay off your other debts instead of disbursing cash to your account.

4. Be Used for Almost Anything

Personal loans are a popular financing option because they are so versatile, and you can use them to cover everything from auto repair costs to home improvements and event-related expenses, like weddings.

Acceptable loan uses vary by lender, but most institutions allow borrowers to use funds for any personal, family or household purposes. Personal loans may not be used to further illegal activity. Some lenders also restrict whether personal loan funds can be used to purchase real estate, pay for post-secondary education or start a new business.

5. Offer Competitive Rates

Personal loan annual percentage rates (APRs) typically range from 3% to almost 50% with the most competitive rates reserved for high-qualified applicants. While the upper range of rates can get high, many applicants qualify for an APR lower than what is available with a standard credit card. However, these rates are still higher than secured loans like home equity loans.

If you’re considering whether to get a personal loan, take time to prequalify with top lenders to see what kind of rate you’re likely to get.

6. Provide Flexible Borrowing Limits

Borrowing limits vary by lender, but personal loans are typically available between $500 and $50,000. For that reason, personal loans can be tailored to meet the borrowing needs of most consumers. Just keep in mind that getting a $50,000 personal loan will likely be more challenging than qualifying for a smaller, less risky sum. Alternatively, if you’re planning to finance a smaller purchase, a credit card or line of credit.

7. Eliminate the Need for Collateral

Most personal loans do not require the borrower to pledge any collateral. This means you won’t have to risk losing a valuable asset—like your home or car—if you default on the loan. However, keep in mind that unsecured loans typically come with higher interest rates and may be more difficult to qualify for because they pose more risk to lenders.

8. Provide Fast Access to Cash

Personal loan application processing and funding speeds vary, but many lenders advertise same- or next-day funding. So, if you’re facing unexpected auto repair costs or emergency travel needs, a personal loan may be feasible.

However, if you need funds in a hurry, carefully research the entire loan application process. The actual time it takes to apply, get approved and receive loan funds can be longer depending on when you apply, the size of the loan and how quickly your bank lets you access the money after it is disbursed.