Using a Personal loan: Advantages/Disadvantages

What is a personal loan?

A personal loan is an agreement between a borrower and a lender. The lender provides a sum of money upfront to the borrower and it is agreed by what date the sum of money will be repaid. Usually loans are repaid in instalments (every month) and the borrower will be charged interest on the sum of money left to repay (which means they end up repaying more than the sum of money that they borrowed). Loans are commonly provided by banks, building societies and credit unions to help people buy expensive items such as a new car or a new house.

What are the advantages of applying for a personal loan?

A personal loan gives a person extra money and so it can help them to buy something large like a car or make home improvements.

A personal loan is a large amount of money that can be borrowed from a bank or building society which can be paid back over a period of time.

The interest rates on a personal loan may be quite competitive, as there are a number of lenders competing for business which can help the repayments be more affordable.

With a secured personal loan, a person may also have access to the money faster, often within 24 hours which is convenient if buying something like a car or making another big purchase.

Taking on a personal loan can create financial independence as the person becomes less reliant on family and is prepared to borrow from financial institutions. This shows maturity and that they are taking financial responsibility.

Below shows some examples of why a person may need a personal loan:

What are the disadvantages of applying for a personal loan?

• Sometimes people cannot afford to make the repayments they agreed to and they face fines/penalties every time this happens which means pay the agreed repayments plus the fines/penalties can make it very difficult for the person to pay back the loan.

• If a person cannot repay the loan, this will affect their credit rating which means they may not be able to borrow money in the future.

• Sometimes people turn to loan sharks to borrow money to help pay off their loan. However, this just puts the person into further debt.

QUESTIONS YOU COULD BE ASKED:

Explain one benefit of a personal loan. (2marks)

One benefit of a personal loan is that it allows a person to borrow a fixed amount of money to pay for large expenses, such as a car or home improvements, and repay it in regular, manageable monthly instalments.

Explain one disadvantage of getting a personal loan. (2marks)

One disadvantage of getting a personal loan is that it must be repaid with interest, which means the borrower ends up paying back more than they originally borrowed.