Risks and Benefits of Taking Out a Loan


If you’re in need of extra cash for important life events, such as a wedding or a home remodel, you may be considering a personal loan. However, taking out a loan is not something that should be taken lightly. Once you take out a loan, you are entering into a binding contract that is very difficult to get out of. While it may feel like free money at first, interest and monthly payments can quickly sneak up on you and may even become a source of stress later on. Here are some risks and benefits to consider before taking out a personal loan.


Benefit #1 - Taking Out a Personal Loan Can Help You Build Credit

If you’re relatively new to credit, or you’re looking to build your credit, a personal loan might be a good idea for you. This is because personal loans require you to make monthly payments on time towards paying off your total balance. By making regular monthly payments, you will be able to build your credit as lenders will typically report your on time payment records to the three main US credit bureaus. 

Consistently making regular on-time payments will boost your credit score over time, as payment history accounts for a whopping 35% of your total overall FICO credit score. However, be aware that late payments or defaulting on your loan will damage your score and it will be harder to get another line of credit or a loan in the future.




Risk - Personal Loans Can Have High Interest Charges

If you are an extremely creditworthy applicant, you may be able to qualify for a low APR. However, depending on your credit score and credit history, your interest rate may be as high as 36%. When considering taking out a personal loan, take your loan terms and interest rate into consideration before deciding. You may benefit from exploring other options for financing personal costs, such as student loans, 0% APR credit cards, or home equity loans. 


Benefit - Personal Loans Can Be Used for Almost Anything

Personal loans are well known for being extremely versatile. They can be used to cover event expenses, home improvement, debt consolidation, medical bills, student debt, tax debt, and even consumer goods. Just because you can use personal loans for certain things, such as vacation or a fancy mattress, doesn’t mean you necessarily should. Your first goal should be to try to save for any non-emergent purchases, rather than taking out a loan with an interest rate attached to pay for something that you could have saved for by budgeting. 

The list of acceptable loan uses may vary from lender to lender, but most lenders will allow disbursed funds to be used for just about any family purposes or personal purposes. In addition, several lenders also do not allow personal loan funds to be used to start a new business or purchase real estate.


Questions About Personal Loans? Talk to a Professional.

Our team of professional financial advisors here at Financial Optics is happy to help you if you are an individual with questions about personal loans. Give us a call today and we’ll help you with all of your personal loan needs. 

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