Personal loans have gained a bad reputation because of high interest rates, but they are misunderstood as loans that trap you into an ongoing cycle of debt. They have gained a bad reputation over time because high interest rates make them challenging to repay. Personal loans are unsecured loans, and therefore the default risk is too high. In order to mitigate their risk, lenders charge higher interest rates.

The risk of falling into debt is high only if borrowers borrow more than their affordability. It is also argued that some people continue to overspend because access to these loans is very convenient. While a responsible lender will run an affordability check, the onus of providing accurate financial information and researching best personal loan rates in Ireland is on borrowers.

What are personal loans?

Personal loans are unsecured loans. They enable you to borrow a lump sum of money that you pay down over a length of time. They are not subject to collateral, which means there is no risk of losing your house or car in case you default.

The case against personal loans

Why personal loans are not absolutely lifesavers:

• High interest rates

Personal loans charge very high interest rates. There are two reasons why they are expensive. First, the risk of default is high, and lenders cannot recover their money in case of non-payment. Second, if you borrow money with a bad credit history, you will be charged even higher interest rates. In case of a poor credit rating, the loan amount will also be restricted.

• Temptation to overspend

Since personal loans are convenient, many people borrow more than they need. They usually use these loans to spend on frivolous purchases. Personal loans have been designed to help people tide them over during emergencies. For instance, if your budget has fallen short of cash to cover your wedding expenses, you can take out a personal loan to bridge the gap. Unfortunately, people tend to borrow more than their needs.

• Fees and penalties

The total amount of the debt steeply increases because of late payment charges and interest penalties. If borrowers try to settle their debt early, they are charged prepayment penalties.

• Consolidation pitfalls

Personal loans are used to consolidate multiple short-term high-cost debts, but there is no guarantee to secure lower interest rates. Lenders usually do not consolidate all outstanding debts into one large personal loan, which means the struggle with payments keeps going on.

The case for personal loans

Here are the reasons why personal loans cannot be considered as bad as they are made out to be:

• Help with meeting small emergencies

Personal loans help with meeting small emergency expenses. Whether you need money for a medical bill or an urgent home renovation, personal loans can come in handy.

• Predictable repayments

Unlike credit cards, you pay down personal loans over an extended duration. Monthly payments remain fixed throughout the loan term. As a result, they are more manageable than credit cards and other revolving credits where you are to settle the whole balance in full.

• Boost credit score

If you pay off personal loans on time, you will see a significant improvement in your credit rating. Those who apply for these loans with subpar credit ratings can leverage a chance to ameliorate their credit histories.

When does a personal loan make sense?

A personal loan is not inherently good or bad. It is all about how you use them. They are suitable in some cases such as:

• You want to consolidate high-interest debts. They will help you manage payments as the cost of consolidated debts is spread over a few months.
• You can cover all types of expenses: unexpected as well as planned.
• You want to build your credit history.

When should you avoid personal loans?

You should avoid taking out personal loans if:

• You are using them to fund discretionary expenses.
• You are using them for recurring essential expenses such as rent.
• You take out these loans without being certain about your repayment capacity.
• You fail to qualify for lower interest rates while consolidating your existing debts.
• Your income is unstable.

To wrap up

The bottom line is that personal loans are neither good nor bad. Whether these loans will work to your advantage or not, it completely depends on how you manage these loans. If you keep borrowing money for discretionary or recurring essential expenses, you will likely fall into debt.

Personal loans will not strain your budget if you use them for one-off costs and ensure that you will not struggle with repayments. Compare interest rates from private money lenders in Ireland so you can choose the best deal.

If you find personal loans unsuitable, you should consider alternatives such as credit cards, borrowing from friends and family, and employer salary advances.