If you are planning to go for Personal Loan, you should check these experts insight.
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My first concern with a personal loan is that it may not be reported to the credit bureau, and an individual seeking a private loan may not help build credit for the future.
If the loan is for a home as an example, unless reported correctly the interest on the note may not be deductible on federal or state tax returns.
Third, if interest rates charged are too low for related parties, in specific cases, it may need to be reported for tax purposes.
Fourth, a private party may charge interest rates greater than for the borrower could get if they had used a typical lending institution such as a bank or a credit union.
Next, if life gets in the way and there is an event that causes default on the loan, is there the possibility that a friendship or family relationship could be ruined forever? Does the lending party have the ability to financially absorb the loss of the loan or if payments can not be made?
Personally, in the examples above a person would try to find another way to fund a venture or purchase and limit the potential effects on family or relationships and look for a loan that the interest is tax-deductible and reported to the credit bureau to build credit.
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Availing a personal loan has good and bad sides. Let us first know that personal loan is typically short which can be paid in a few months or years. This kind of loan has no collateral meaning that it is unsecured and there is no guarantee as paying it back.
Mostly, young people get personal loans that have a higher interest because it is the only guarantee for the lender. Here are the identified disadvantages of personal loans.
- You can get trapped in a debt cycle because getting a personal loan does not change the fact that you still have debt.
- They have higher interest rather than some loans.
- They come with origination fees. It covers the cost of processing the loan and usually ranging from 1 to 6 percent.
- You may be penalised for paying it off early. Even you are courageous enough to pay it off at the earliest time possible, you still have to pay for the fine of not abiding with the contract.
- Your monthly payment and loan term are fixed. Being late in paying the debt for scheduled time can lead to a lender sue you.
- They attract scammers and people are mostly victimised due to their eagerness to have the money. They tend to give every information and the scammers are using it for their personal gain.
A home equity loan is one of the best alternative as it offers low interest for the loan.
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When I was still in the early stages of my business, I thought of taking out personal loans too.
However, as I researched more about them, the more I got convinced that it is generally a bad idea.Personal loans will qualify you for secured loans.
This means if you don’t manage to pay your debts, your bank has the right to collect your personal property instead such as your house or car.It is always risky to get personal loans because of the interest.
Personal loans may be quick cash but you still need to repay it plus you will need to pay an additional fee for the interest you accumulated.
It is far better to focus on expanding your income that gunning for personal loans. However, if you really can’t avoid it, make sure you do your research on low-interest rates. Keep your payments up to date, and build a good credit score.I hope this was helpful.
Holly Andrews is a qualified and largely experienced mortgage and loans advisor and is Managing Director of financial broker,KIS Finance.
Why personal loans are bad for your finances
If you start taking out personal loans, before finding the reason why you need to rely on credit in the first place, you could find yourself getting trapped into a debt cycle that you can’t escape.
If the personal loan is to cover a completely unexpected expense like medical costs or vehicle repairs and you don’t have any other means of paying, then that’s different (although this should be a wake-up call to start building an emergency fund).
But if you’re taking out a personal loan to consolidate credit card debt then this could cause problems.
You have to remember that the old credit card debt is still there, it just looks different, so if you continue to rack up large credit card balances then you’ll soon find yourself in a very difficult situation.
If you have gotten to this stage of needing a personal loan to cover other debts, then you need to seriously address this situation and start adjusting your lifestyle.
One way to get a lower interest loan
One way to get a lower interest personal loan is to offer your home as security. The interest rate is lower on secured loans because the lender has something to seize and sell in order to get their money back if you’re unable to repay it.
This does mean that there’s a risk of losing your home, but this is only if you default on your loan repayments so it should give your more motivation to keep on top of them.