debt free living

Pros and Cons of Taking Out a Loan

This is a guest post by Daniel Kidd.

If you buy a house or a car, chances are you are going to take out a loan to do it. People take out loans for many other purposes as well: to go to school, to take a vacation or to start their own business. Taking out a loan has both pros and cons, and you should study those carefully before making a decision.

Probably the biggest con of taking out a loan is the finance charge. Banks and other lenders make money off of loans by requiring the borrower to pay back more than he borrows.This makes it extremely important to make sure you get the lowest interest rate possible for your loan.

Price comparison sites are a good way to help you do this. You can compare unsecured loans– those that require no collateral — and secured loans to find the one with the best interest rate. For example, a 1-point difference in the interest rate on a $100,000 30-year mortgage can save you more than $20,000 over the life of the loan. When you compare unsecured loans, you won’t save as much money, but you could still save hundreds of dollars.

Loans also carry fees, which is another con of taking out a loan. For a mortgage, the fees can run into the thousands of dollars for things such as an appraisal, title search and an inspection. Most other loans require at least a credit check, for which the lender will charge you.

Another con of taking out a loan is the legal commitment you are making. You are agreeing to make regular payments over a certain amount of time until the loan is paid off. If you fail to meet those commitments, the lender can repossess your car or home, in the case of a secured loan, or file a lawsuit against you, in the case of an unsecured loan. In either case, failure to repay will hurt your credit score and make it harder to get credit in the future.

On the other hand, if you make your payments on time and fulfill the terms of the loan contract, it will help you build a solid history and a good credit score. This is one definite pro of taking out a loan.

Another pro of taking out a loan is that it allows you to buy something or pursue a dream that you might not otherwise have been able to do. For the average person, it would take many, many years to save up enough money to buy a decent house with cash. Also, many people wouldn’t be able to afford to go to college without a student loan. And if you want to start your own business, a loan may be the only way you can get enough money to cover start-up costs to get it off the ground.

This is a guest post by Daniel Kidd.

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