Personal loans are unsecured loans that could be utilised for a variety of purposes. Unlike same-day loans, personal loans are offered after a perusal of a credit report and income sources. They start with at least €5,000 repaid over an extended period of time. The repayment length hinges on your repaying capacity, so flexible deals will be offered to you. You may be given either six months or a year to discharge the debt. It absolutely relies on your repaying capacity.

All types of loans that are not subject to collateral are called personal loans. Small emergency loans like payday loans and home collection loans are also personal loans as they require no collateral, but what sets them apart from other loans is that they are employed to meet large purchases.

While small emergency expenses are employed to meet unexpected expenditures such as car repair, larger personal loans are brought to cover expenses for weddings, vacations, large purchases, and the like. Personal loans are considered better than small emergency loans as payments are flexible and more manageable, but they are subject to a few drawbacks, too.

Pros and cons of personal loans for large purchases

 Here are the advantages of unsecured loans for large purchases:

·        No collateral is required

One of the significant benefits of personal loans is that they do not require collateral. Even though the borrowing is €5,000 or more, you do not have to secure these loans against collateral. Normally, secured loans are always subject to the risk of losing your personal assets, which is more often than not your house.

There is no risk of losing your collateral if you fail or refuse to discharge the debt on time. However, there would be other consequences to endure. Lenders typically approbate applications for personal loans in Ireland on the basis of your income. The stronger your repaying capacity is, the higher your chances of approval will be.

·        Interest rates are competitive

Interest rates are competitive for personal loans. Compared to small emergency loans, personal loans carry lower interest rates. However, it is essential that you have a good credit score. Lenders do not fight shy of approving your application despite a bad credit rating, but interest rates will be quite high. Even so, the annual percentage rates of personal loans are lower than those of loans in Ireland with bad credit.

·        Personal repayment terms

Personal loan lenders offer customised repayment terms. They decide the repayment term based on your repaying capacity. It should not be surprising that two borrowers with the same credit rating and the same borrowing amount are offered two different repayment plans.

One might have a shorter repayment length than the other. It boils down to their financial circumstances. Of course, when your living expenses are high or monthly wages are low, you will have to choose smaller monthly instalments, which extend the repayment term.

·        Quick disbursal

Personal loans involve a larger amount of money than small emergency loans, and yet their approval process is fast. As personal loans involve a detailed affordability check, it is not possible to approve the loan application on the same day. It takes a couple of days to complete the process. However, it does not take more than two or three days. Once you sign the agreement, the money is directly transferred to your bank account within a couple of minutes.

·        They help boost your credit score

Personal loans are paid down over a period of time. Since you make payments over time, it shows your loyalty and commitment despite the financial ups and downs. Therefore, timely payments will boost your credit score.

While personal loans have loads of benefits, they are subject to certain drawbacks, too.

·        High interest rates

Personal loans are more expensive than secured loans because they are not subject to collateral. Most of the lenders charge high interest rates and restrict the loan amount too. Interest rates are normally influenced by the risk they perceive from you. They will charge higher interest rates if you are deemed to be a risky borrower.

It is always suggested that you carefully research the market because each lender has its own method of calculating the risk involved in lending you money. Since each lender charges different interest rates, you should always try to choose an affordable lender.

·        High fees and penalties

Personal loans are expensive because of high fees and penalties. At the time of processing of your loan application, you must be charged upfront fees. In addition, there are other fees and monthly charges too. If you fail to pay down an instalment, late payment charges will be added. Interest will also be added to the unpaid balance. This quickly accumulates the debt, making it even more challenging for you to repay the debt. You will highly likely fall into an abyss of debt.

·        No payment flexibility

While personal loans decide repayment terms based on your financial circumstances, you will not have the flexibility to change it even if your financial condition worsens. You are strictly supposed to adhere to payment schedules. If you miss a payment for whatever reason, you will end up with late payment fees and interest penalties.

You should always be concerned about your repaying capacity. A golden rule of thumb says that you should carefully check whether your budget has wiggle room to meet payments along with your essential expenses. Reduce the borrowing amount if your budget is tight. This will lower the cost of the debt. Yet, it is recommended that you carefully research the market to choose affordable interest rates.

·        There is a risk of falling into debt

One of the biggest drawbacks of using personal loans for large purchases is that they could throw you into an abyss of debt. Personal loans are short-term loans, meaning the repayment length of these loans is not so long. As a result, the size of your monthly instalment will be large. It adds a financial burden. Now, not only do you have to meet your day-to-day essential expenses, but you also have to pay down a personal loan.

Further, there is no guarantee about your financial condition. It is likely that you lose your job. You might suffer to repay the debt if you do not have an alternative repayment plan. Consequently, you might fall into a deep hole of debt.

The final word

Personal loans have loads of benefits. They help build a credit history, provide customised repayment plans, and offer the most competitive interest rates. However, they have certain drawbacks too. They include high interest rates, high fees, interest penalties, and the risk of falling into debt. It is recommended that you carefully evaluate your options.