When you are caught off guard by emergencies and do not have savings to fall back on, you rush to lenders to borrow money. Thanks to online lending platforms, loan applications are processed without further ado. You get money directly in your bank account the same day you put in the application.
Personal loans can be used to meet unexpected and planned expenses. The repayment length of these loans can last for up to 12 months, depending on the amount of money. If you have borrowed a small sum, you will be required to pay off the debt in full, but payments will be made over a number of fixed instalments if the borrowed sum is larger.
When you are in need of money, you do not give a second thought to personal loans. No sooner do you need money than you apply for a loan, but the fact is that personal loans are expensive. As they are not subject to collateral, you will be charged slightly higher interest rates. Many people wonder whether it is always a good idea to use personal loans. Are there any risks other than the fact that you will fall into an abyss of debt if you fall behind on payments?
Are personal loans always a good choice?
Well, personal loans are not always a good idea. Whether you need them to meet short-term emergency expenses or large expenses, there are a few circumstances when they are not recommended at all.
- No credit check is to be made
A few lenders are out there who can provide you with a small personal loan without any credit checks at all. Such loans are called emergency loans and are aimed at bad credit people. Every time you apply for a loan, a lender is supposed to run hard checks. It leaves hard search footprints that can be visible to other lenders, and they stay on your credit report for two years. In order to protect their credit score, people often use loans without any credit checks at all.
No credit check loans can be dangerous. An ethical lender is not supposed to lend you money without running a credit score check. Of course, you will be refused a loan if your payment history is not stellar. No lender would take the risk of lending money to someone who never intends to pay back.
Lenders who provide no-credit check loans can be unregistered. They sell these loans to trap gullible borrowers into their expensive loan deals. They take advantage of people’s fear of losing their credit points due to a hard credit check and, therefore, charge very high interest rates.
It is assumed that your credit score is very bad, and the risk is way too high to lend you money. Most of the time, the amount of these loans is so small that they are paid back in a lump sum on the due date. It can be hard to pay it off, and once you fall behind on the payment, you will be deeply buried in a debt hole.
- When you have cheaper alternatives
Personal loans in Ireland can prove to be a bad idea if you have cheaper alternatives. Before applying for these loans, you should carefully find out if there are any cheaper alternatives. For instance, when you need £500 to pay your mechanic, you can use your credit card instead of using a small emergency loan.
One of the greatest benefits of using a credit card is that you do not have to pay interest. After the bill is generated, you will have a grace period to clear your balance. You do not have to pay interest if you pay within this period. Interest will be charged only if the grace period is over.
Some people use personal loans to pay off their credit card debt. Once you fall behind on your credit card balance, you will quickly end up with credit card debt. This is because interest is accrued on the outstanding balance by the day. You can use personal loans to pay off your outstanding debts, but they are not so cheap.
In fact, you should consider using a 0% interest credit card. You can qualify for these cards only if your credit report is up to scratch. You will be offered an interest-free period. Make sure you settle your outstanding balance within the interest-free period; otherwise, you will end up paying even higher interest rates.
- You cannot manage your debt
Small loans in Ireland are quite expensive. They carry high interest rates even if your credit rating is stellar. However, studies have found that people with good credit borrowers hardly use such loans to meet the unexpected. These loans are generally aimed at bad credit borrowers, and therefore, high interest rates are charged.
You think that you can easily handle the debt payment because it is paid off the day after your next payday, once and for all. Unfortunately, these loans are not as cheap as they seem. Because the payment is to be made the day after your next payday, you think that you will not struggle to handle the debt.
However, after paying off your debt, you find that you are left with little money, which cannot be sufficient to meet your regular essential expenses. As a result, you borrow again. This time, you will be charged even higher interest rates because of frequent credit inquiries. This cycle continues because you will face the same problem, and eventually, you will find yourself in insurmountable debt.
Whether you use personal loans for small emergencies or planned expenses, you should always carefully analyse whether you can repay the debt on time. Make sure that you do not end up rolling over the loan because it will trap you in debt.
- You are using them only to build your credit score
A good credit score is a must to qualify for a loan. Unfortunately, many people struggle to maintain a good credit report. In order to fix their credit rating, they use personal loans. As money is to be paid back in fixed instalments over a period of time, you will see an improvement in your credit score.
However, you should avoid using these loans to damage your credit history. Your old inquiries and defaults will not disappear from your credit file after making a few payments on time. They will remain on your credit report for six years. Of course, they will influence the lending decision of a lender.
Furthermore, most small personal loans are paid off in a lump sum. They cannot help build your credit score at all. Credit builder loans, which are exclusively known for improving credit rating, are a type of personal loan. They should also be avoided. Such loans can be very expensive and can do more harm than good.
The bottom line
Personal loans are not always a good choice to meet your needs. If you know you cannot manage the debt, you should avoid them. Make sure that you do not use personal loans without any credit checks at all. They are not recommended even when you intend to improve your credit history.