The Pros and Cons of Personal Bank Loans

Personal bank loans are often unsecured loans, loans that do not require collateral. The bank provides the borrower with a certain amount of money, which is repaid over time with interest. Many people use unsecured bank loans to pay for vacations, new furniture and moving expenses.

Advantages:

• You do not have to provide collateral. Many loans require you to have something of value for which you can borrow money against. For example, a car loan and a mortgage both have a large piece of property attached to the loan. The bank can reclaim the house or the car upon failure to pay. Personal loans are a good option for people who may not have anything to offer for collateral.


• Personal loans have a fixed interest rate, unlike some credit cards. Some credit cards have a variable interest rate. This means your rate can change based on bank decisions or if the Federal Reserve adjusts interest rates. Personal bank loans have a fixed interest rate that cannot change.


• You can apply for the loan electronically. Many banks allow you to apply for a loan online or over the phone. You usually get a decision in a few minutes.

Disadvantages:

• Personal bank loans may have a higher interest rate than other types of loans. Because the loan is unsecured, the bank can ask for a higher interest rate. The higher interest rate ensures the bank receives some money from the loan in case you stop paying it back.


• You may pay a penalty for paying off the loan early. Banks count on compounded interest to make money from your loan. Paying it off early can cause the bank to lose money in interest. Check with various banks to determine whether there is any penalty to paying the loan early.


• You can borrow only a certain amount. Personal loans are typically not made in amounts over $10,000. However, many people are approved for much lower personal loan amounts, ranging from $100 to $1,000.