Where It Usually Begins
Moments and times come in a person’s life where their
concern for money becomes serious. This does not happen because they are in an
extra need of something, but because there is a particular situation that
demands it. The situation could be that of an emergency, maybe a
responsibility, or, surprisingly, an opportunity. Mostly, that is when the idea
of taking personal loans comes to mind.
In most cases, people do not in the first place plan to take
loans. It often comes as a response to a situation that requires financial
attention immediately. I have personally observed that most individuals begin
to consider personal loans when their savings are not enough for them, and the
pressure to do something about it quickly becomes something they cannot avoid
at all.
Before making such a decision, it is important for you to understand what a personal loan entails and the effect it can have on your financial situation in the long run.
My Own Experience
If not for the fact that some information has to be kept private to protect the internet’s ecosystem, I would have uploaded the photo of my loan history statement on this platform. I had the opportunity to take MTN Qwikloan once, and since then, I have not been able to quit loan taking. To me, it has become some sort of addiction I cannot get over. The reason is that, when I took the first loan, I paid it back as early as possible. But then, I had to get the money I used to pay it back, and that restricted me from borrowing again. This time, I borrowed a higher amount. At a point when I stopped taking the loan and felt it was the last, my phone got spoiled that same day. As a matter of fact, I had to take that personal loan again, and the effects, you will come across it in this post as you continue reading.
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| A reminder message from Qwikloan for me to pay my loan off before the deadline |
The Definition of Personal Loan
A type of borrowing where an individual receives a fixed amount of money from a financial institution, such as the bank, micro-credit companies, and agrees to repay it over a period of time, usually with interest, is what is referred to as a personal loan.
Unlike secured loans, which require what we call a collateral before a loan can be granted, personal loans do not require any collateral. This simply means that you are not required or obliged to provide property or assets as security. This is to ensure that the loan is repaid, and failure to repay means your property will be seized and traded in place of the loan repayment. The approval of a personal loan is often based on some factors. As someone who has a real estate background in real estate finance, these factors include a person’s level of income, their credit history, and their ability to repay the loan.
According to the Consumer Financial Protection Bureau (CFPB), personal loans are commonly used for purposes such as medical expenses, education, home repairs, and debt consolidation, while others take it for their personal goals and plans.
What are some of the advantages of taking a personal loan? (Pros)
1. There is quick and immediate access to funds
One of the major reasons why a person will start considering
the taking of a personal loan is because of the speed at which funds can be
accessed. In situations where time is limited, personal loans can be very
helpful.
From what I have seen and learned, individuals facing urgent
needs often rely on personal loans because the process is very fast when compared
to other forms of financing.
2. No Collateral Is Required
Another important advantage of a personal loan is that a person does not need collateral to access it. This makes personal loans easily accessible to individuals who may not have assets such as land or vehicles to secure a loan.
This feature alone has made personal loans a preferred option for many people, especially in developing communities.
3. There is a Predictable Repayment Structure
Paying back personal loans usually comes with a fixed monthly
repayment structure. This structure allows
people who borrow it to plan their finances very well since they already know
how much they are expected to pay each month.
4. It Gives People the Opportunity to Improve Credit Score
When it is managed properly, personal loans can help
individuals improve their credit score. Making payments on time shows how
responsible a person is financially. This signal helps borrowers improve their credit
score and gives them the opportunity to easily access loans at any given period
of time.
The disadvantages of taking a personal loan(Cons)
1. There is High Interest Rates
Though there are some reasonable benefits, personal loans
can also come with high interest rates, and this happens to especially
individuals with lower credit scores.
This means that, as time goes on, the amount required to be paid
back may be a lot higher than the initial amount the individual went to borrow.
2. Fixed Monthly Obligations
Although fixed payments can be helpful sometimes, there are
also times when they can become a burden if your financial situation changes.
There is always a risk that income may reduce or unexpected
expenses may arise, and this makes it difficult for people to meet repayment
deadlines.
3. There are Additional Charges Involved
Some personal loans include costs that are hidden. These costs
include the processing fees, late payment penalties, and other administrative
charges.
These charges are not always obvious at the beginning, which
is why it is important to carefully review all terms before accepting a loan. From
my own experience, there are even micro-credit companies and apps structured
for personal loans that do not openly add the processing fee and administrative
charges to their terms and conditions. They deduct it from your loan amount and
send you a small amount of money, but require you to pay back the loan amount
you took, together with the interest. The screenshot below is proof from people
who have actually experienced the situation.
4. Risk of Debt Dependency
One issue that people often overlook is the possibility that
they can become dependent on loans, as in my own case.
In some cases, individuals take new loans to repay existing ones, which can gradually lead to a cycle of debt that becomes difficult to manage. I have experienced this situation personally, and getting over it is difficult situation. If it has not been for you, it has been for me, and probably for someone who happened to find themselves in my shoes.
Things You Have to Consider Before Taking a Loan
Before taking a personal loan, it is important to ask yourself
and ponder over a few questions. Questions like:
- Is this expense (loan) necessary?
- Do I have a stable source of income?
- Can I comfortably meet the monthly payments?
- Have I compared different lenders and their terms?
These questions will help you know if you are taking the
right step or not.
Final Thoughts
This is not to say that taking a personal loan is a bad decision.
However, taking a personal loan requires you to carefully make good
considerations and plan properly.
Often, from what I have observed, the outcome of taking a
loan often depends on what it is being used for and how well it is being
managed. When used responsibly and
wisely, personal loans can provide support during difficult times. On the other
hand, when you plan poorly, it can lead you to a series of financial stresses.
Understanding both the advantages and disadvantages, that is,
the pros and cons, will help you make a decision that is suitable for your
situation.
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