Taking out a Loan: the Pros and Cons

pros and cons of loansThere comes a time in most of our lives when we need a swift injection of cash. Whether we want to make a special purchase, take someone special on holiday, pay off or consolidate debts, or we are taking out the ultimate loan – a mortgage on a house – a loan is usually the way forward. Adverts for loans of every kind, offering a dizzying variety of interest rates, terms and conditions are ubiquitous.

What makes a loan a loan?

There are a lot of different forms that a loan can take, from the aforementioned mortgage to a standard unsecured loan from a bank or building society; from payday loans to loans secured against the value of one’s car – the so-called “logbook loans”. They all share basic attributes, however: you receive an agreed sum of money with the agreement to repay it over a period of time and at a rate of interest. If you’re thinking about getting a loan, it therefore pays to consider the pros and cons of such a decision. Here’s the top three of each…

Pros

  • Fast, convenient cash. There are times when you don’t have the time to save. You may also need some swift liquidity in the midst of a cash-flow crisis. If so, then loans could be the answer.
  • Peace of mind. Knowing that there’s “wiggle room” in your bank account is a great weight off your mind, as is knowing that your loan has consolidated your debts to a simpler, more manageable level.
  • Credit rating boosters. When a loan is successfully repaid, the borrower’s credit rating improves. This not only makes future borrowing easier, it also increases the amount that can be borrowed in the future.

Cons

  • Interest rates. It is very important to know what interest rates various loan deals are offering – and how this factors into a repayment plan. Otherwise, there’s the risk of getting bogged down in endless repayments at a high rate.
  • Changing circumstances. It’s perfectly possible to take out a loan when you are comfortably earning, only to find repayment a struggle due to unforeseen events such as illness or redundancy. Taking out PPI (Payment Protection Insurance) can alleviate this risk, however.
  • Mind your assets. Be aware that any secured loan (such as a car loan) can lead to loss of the assets in question if repayments are missed. Be sure to stay on top of things.

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