Pitfalls of Borrowing: What to Lookout for When Taking Out Personal LoansReviewCompareAdviceFAQ'sCalculator

Pitfalls of Borrowing: What to Lookout for When Taking Out Personal Loans

Personal loans can come in handy when last minute expenses arise or an emergency strikes. While there are many advantages to getting a personal loan, they are not without their share of faults. In this post we'll highlight both the pros and cons of personal loans as well as tips for reaping the most out of the process.

Advantages of Personal Loans

If you're considering a personal loan it's important to compare the alternative borrowing options. Using a credit card for example, may seem convenient at first, but if you become past due on your payments, you'll likely see interest rate hikes. Another point to keep in mind Personal loans are typically offered at a fixed interest rate and fixed term period. Unlike using a credit card where you could be paying minimum balances for 25 years and still not be paying down the principal amount, with a personal loan when the debt is paid off have complete peace of mind.

Pitfalls of Borrowing: What to Lookout for When Taking Out Personal Loans

Secured vs. Unsecured Loans

When exploring your various options it's wise to have a clear understanding of the difference between secured and unsecured loans. Secured loans, in stark contrast to unsecured, have so form of collateral tied to them. In other words, you pledge an asset (i.e., a vehicle, real estate) which then gives the finance company or bank a hold on the deeds or titles. If you fail to repay you loan or infringe on the terms of agreement, the lender has the right to place a lien on those items (until repayment is made) or take those possessions altogether. Unsecured loans tend to be riskier for lenders because there's no pledged property or assets to go after in the event you default on the loan. Examples of unsecured loans include credit cards, personal lines of credit, signature loans, student loans, certain home improvement loans.

Will I Get Approved for Online Personal Loans?

It's difficult to pinpoint who exactly get's approved for personal loans online because many factors are taken into consideration. In general, lending institutions evaluate applicants based on the five C's of credit:

  • Character
  • Capacity
  • Capital
  • Collateral
  • Conditions

Understand the Five C's of Credit

In this case, character is you overall reputation as a borrower. Do you have a positive track record of paying back loans? What does you credit history say about your financial character. Capacity basically measures you income to debt ratio to determine your ability to repay the loan. Capital and collateral are the upfront amount or assets you pledge to secure the loan. Last but not least conditions represent the specifics of the loan like interest rate and amount.

Apart from traditional banks, there are a number of unsecured personal loans online you can apply for. Peer-to-peer lending (P2PL) bypasses these channels and instead operates more like a public credit marketplace in which investors can front the funds. If you opt for this route it's crucial to perform your due diligence. Be sure the website is a reputable organization with a long-standing history, check that they are in good standings with the lending regulatory agencies and that you receive all the terms of your loan in print.

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