Pros and Cons of Personal Loans

Understanding a personal loan’s advantages and disadvantages is crucial when looking for a money lender or a financial institution or deciding where to apply for a loan. While personal loans can be a blessing in multiple situations, they can come with higher interest rates and may affect credit scores.

Even so, the advantages of a personal loan may outweigh the disadvantages, especially if you are eligible for a competitive interest rate and need emergency funds. So in today’s article, we will be discussing the pros and cons of a personal loan. If you are looking for attractive rates on personal loans Calgary, head on to Alpine Credits.

What is a personal loan?

A personal loan is an unsecured type of loan where you can borrow a lump sum of money and pay it back in monthly installments. This installment will include a part of the principal amount and the interest rate charged by the lender. You can get a personal loan from a bank financial institution, online money lender, or credit union.

How does a personal loan work?

When a credit union or a money lender approves a personal loan application, the applicant will receive the amount within a couple of hours to a maximum of 24 hours in the form of bank drafts or account deposits. 

However, the way the consumers may use the funds is not fixed, as they can use them for any purpose. But, certain money lenders may have rules and regulations on how consumers spend the loan proceeds. So you need to know whether your lender has such rules or not.

Pros of a personal loan

  1. Financial flexibility

You can use the personal loan for any expense. Some of the common reasons why Canadians apply for a personal loan are:

Debt consolidation: Usually, a personal loan has a lower interest rate than a credit card loan. Therefore, you can combine all your previous loans into one payment – a debt consolidation personal loan.

Events: If you are planning your wedding or taking a holiday, a personal loan can help you fulfill these desires with manageable monthly installments.

Home renovation: Personal loans are usually quickly approved. Therefore, you can use them to pay for household purchases, buy new appliances, or for home improvements.

  1. Unsecured loan

Most personal loans are unsecured, meaning you do not have to submit any form of collateral like your home or car to back your loan. However, the interest rate charged is higher compared to a secured loan. But, the benefit is that you won’t risk any chance of losing your assets for defaulting on the payments.

  1. Competitive interest rates

A loan’s interest rate is considered good if it is below the national average. APR for a personal loan is comparatively lower than the standard rate for credit cards, personal lines of credit, or other types of loans.

  1. Predictable and fixed monthly installments

Personal loans usually have fixed payment schedules and interest rates. However, you still have the option to choose a variable interest rate. Simply speaking, your loan interest rate and the installment amount will stay the same each month. Therefore, it becomes easier to manage your monthly budget.

  1. Qualifying credit

Even applicants with a low credit score of 580 can qualify for a personal loan. However, you must remember that a lower credit score might attract a higher interest rate.

Cons of a personal loan

  1. Various types of fees

While taking out a personal loan, you may need to pay a certain fee like:

  • Nonsufficient funds, NSF
  • Late payment fee
  • Loan origination fee 
  • prepayment penalty 
  • application fee

It is always advised that you discuss the fee and other charges with your lender upfront to get an approximate idea of the overall recruitment. You can research and dig and ask your money lender to waive a certain fee. Some financial institutions might charge prepayment penalties.

  1. Credit damage

Most financial institutions and credit unions report positive payment history to the credit bureaus. They also report late payments and nonpayment. This is why borrowers who fail or delay making on-time payments or default on loans together have a lower credit score.

Additionally, whenever you are applying for a personal loan, it accounts for about 30% of your FICO credit score.

  1. Unnecessary debt

Depending on the reason for applying for a personal loan, a personal loan can often lead to unnecessary debt. However, before applying for a loan, be it a small or a significant amount, you need to evaluate the reason why you are borrowing the funds and whether a personal loan is the best solution or not.

  1. Credit consequences

When you apply for a personal loan, the lender or the financial institution performs a hard credit inquiry on your credit report. This can temporarily affect your credit score for a year and might sometimes stay on your credit report for more than two years. However, this is a regular part of the loan application process.

Also, making late payments or defaulting on a monthly installment bill affects your credit score. So, if you have trouble remembering the month’s due dates, you can always set up automatic bill pay.

  1. Require collateral

If you have a lower credit score, you might need to submit your assets as collateral to qualify for a secured loan. This is a typical case with applicants with a FICO score below or around 585. In this case, this personal loan becomes a secured loan, and the lender or the bank might keep the collateral if you default on the payments. Common types of collateral include cars, boats, certificates of deposit, houses, etc.


Every year millions of Canadians take out various types of personal loans, and this trend is expected to continue in the coming years. Whether you require money to pay for unexpected expenses or to finance a wedding or a dream vacation, having access to credit is always important. 

However, before taking out a personal loan, you must carefully plan how you will spend the money and repay it with interest to the bank. You also need to compare the benefits and disadvantages of a personal loan and then select whether it is a good financing option or not.

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