Personal loans offer great advantage and convenience when in the need for money. You can use your loan for any purpose. You aren't securing your loan with any type of collateral. Funds often received in 48 hours or less. And these types of loans offer flexible borrowing terms. However, when you compare personal loans with secured loans, it is easy to identify some potential disadvantages.
Higher Interest Rates
As a result of not securing these types of loans with any type of collateral, personal loans are labeled high-risk by lenders, even for individuals with prime credit. Consequently, interest rates associated with personal loans are typically higher than rates of secured loans. As a result of these higher rates, the total cost of your loan is going to be more than typical secured loans. Personal loans with longer terms are going to be more expensive than loans with shorter terms. It is important to understand that when you use a shorter term loan, your monthly premiums are going to be higher since you are reducing the timeframe you have to pay your loan.
Grace Periods
The grace periods associated with personal loans are usually not as desirable when compared to secured loans. You can miss at least one, maybe two or even more payments with a secured loan before your negative account activity is reported to the credit bureaus. Your account will probably be sent to collections if you fail to pay after four or so billing cycles. On the contrary, grace periods for personal loans are typically 1 – 2 weeks after the due date. If you neglect to pay your bill within this time, you credit will be negatively impacted. And your account will likely be sent to collections within weeks of not paying your first missed payment.
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Representative Personal Loan Example: For a $5,000 36-month loan at an interest rate of 6.03% with a 1.11% origination fee of $55.50, you will receive a loan amount of $4,944.50 and will make 36 monthly payments of about $152.18 at a 6.78% APR. Total loan cost would be $5,478.48.