You might have different needs, most seemingly impossible, which exceed the normal person’s needs. This can include unforeseen medical bills or pay for your own or your child’s education.
However, there might also be the need and desire to start your own business; or you may want to start a venture, such as investing in a company. You may then need funds to make your wish a reality. All of these things need to be considered in detail.
A personal loan may be a way to get your business off the ground and turn your dream into a reality. There are many potential routes to access this, and you need to have a good idea of what you need before you apply for one.
Before you apply for a personal loan, you should grasp that there are benefits, as well as, pitfalls. More so, you will need to assess before you apply for a personal loan.
If you cannot afford to make the payments, you may lose everything you have worked for. It is not a decision to take on lightly.
The Pros of a Personal Loan
A personal loan is a multi-purpose loan. A benefit of personal loans is that they have multiple purposes which means that they can, therefore, be used for different types of responsibilities.
This is unlike a home loan, where the loan has a very specific purpose. A personal loan is flexible and can be used for a myriad of reasons. This means that the funds could be used for paying off debt, paying for your wedding, buying a new car, and so on.
More so, you could use these funds either to start or to expand and improve your business. The options are pretty much endless.
With a personal loan, the approval process is speedy, as long as you have all of the required information and proof they will need. Another benefit of this type of loan is that you don’t need to offer your assets as collateral.
This is because of the overall criteria for obtaining the loan are the presenting of the applicant’s identification and proof of income.
However, note that lenders’ requirements might differ. The common view is that, with this loan type, the criteria are very simple, and the approval application process fast. This aspect makes this type of loan rather attractive: an unsecured loan is possible in a short time frame, normally within less than a day.
This ease and speed of approval permit borrowers to cover the needs of urgent payments, such as buying equipment or paying salaries during the start-up phase of your business. This can literally save you if you have a cash flow issue, which is the most common killer for new businesses and ventures.
The Cons of a Personal Loan
There are cons to personal loans, you need to consider the following aspects before coming to a decision. Applying for, and obtaining a personal loan, might be a useful financial tool to assist you speedily to own your own business and fulfilling your dream.
However, there are certain points to be mindful of to prevent you from falling into a debt trap. In the US, for example, personal debt exceeds $4 trillion, according to the Federal Reserve Bank. Debt can spiral out of control very quickly and you need to ensure it is a short term solution, and that you have a plan for the future.
There is, of course, a downside to high-interest rates. Unless you have a very high credit score, you could be paying a lot more for the loan amount over time. This is because a personal loan normally attracts higher rates of interest (banks take a greater risk when no collateral is required).
Many lenders are also fooled by banks’ smart marketing. Banks often promote a best-case scenario, by showcasing a low rate. The borrower, therefore, before accepting such a loan, needs to read the fine print.
Borrowers should also shop around before committing, taking great care in their decision-making and in comparing loans. There is a lot of variance in the personal loan market so shopping around for the best rates and offers is a must.
A personal loan is not a tool to aid the borrower in continued spending. This type of loan could help you manage your debt. However, you will need to keep in mind that this will not be a cure for your spending. You have to fully understand the route cause of your financial problems.
You also need to understand the psychological reasons for your debt have built up in the first place. Reasons could range from denial, and stress, to suffering from debt-anger syndrome. There is a host of other reasons for debt accumulation.
When you start combining your business and personal needs, you have bad spending habits then this combination may not have a desirable outcome for you, or for your new venture.
With a personal loan come consistent monthly repayments. Unlike a home loan, for example, with a personal loan, many financial institutions don’t offer a flexible option for the borrower to select the period over which they wish to repay the loan.
Similarly, unlike a credit card debt, there is no minimum repayment option available. Instead, borrowers will need to pay back a fixed amount monthly. Failing to do so, could mean higher interest penalties.
Therefore, you will need to budget these repayments into your monthly finances, to gauge whether you can remain afloat. If you can’t see a way out long-term, you need to consider what other actions you could take to resolve the issue.
Not all personal loans are the same: some are scams. In many cases, borrowers approach a personal loan as a tool to overcome an instant need. They may need a quick fix during a time when no profits will be coming into a new business.
Or, when establishing a new business, funds may be needed for setting up, or physical investments may be demanded. Therefore, many not-so-legit financial institutions have surfaced – ostensibly to service desperate people. These companies should be avoided at all costs, as they are not looking to support you, they want your money.
Consumers must, therefore, proceed with all due caution. Potential borrowers should research the financial institutions specifically to discover whether such institutions are properly registered. If they are not regulated or offer ridiculous rates it should be setting off alarm bells internally.
Do they offer the right registered financial bodies and are they thus compliant with state law? This type of research can be done online, or through contacting the State Attorney General’s office, to obtain verification.
The Bottom Line About a Personal Loan
With the benefits of this type of loan, such as its ease, speed, and flexibility, this type of loan could address the various obligations you might have.
However, there should also be due diligence when it comes to considering a loan. You, as a potential borrower should inquire whether this sort of loan is the correct option for your situation: will it work with your budget?
That said, a personal loan is a good way to consolidate debt, and gain control of your finances. However, if you don’t address your habits, this type of finance could, instead, increase your problems.
It could even lead to the failure of your venture, no matter how good the business model appears.