Formally, modern lending roots date back to ancient Rome and Greece when farmers take grain loans to plant crops. The ancient system was pretty similar to payday lending as farmers would pay the debt off until the next season's planting. Since that time, the lending mechanism has been changed a lot. However, the question of should you go for a loan or not still remains unanswered.
Today we will talk over the advantages and drawbacks of borrowing and explore the nitty-gritty of lending philosophy.
The Advantages of Getting a Loan
Taking out a loan is an important event in financial planning, and everyone needs to take it responsibly. While getting extra cash may tackle your problem, all loans feature both negative and positive sides that you should take into account before getting one.
An Opportunity to Get Extra Advances
No one knows for sure what tomorrow will bring. Will you maintain the same financial stability as you have today, or you will lose everything in a matter of seconds?
Despite many negative concerns related to personal finance and borrowing in general, taking out a loan is not a misfortune. Getting extra cash may save the situation when your budget suffers from a shortage. In fact, getting a loan leads you to debt, but it also opens up new horizons if you take it responsibly.
Versatility
Understanding which is the right type of funding for you is an important issue. Fortunately, the modern lending system is pretty versatile. There are different types of credit tools customized under different needs. For instance, if you look for a large amount to pay back within a long period of time, you are welcome to get personal or installment loans. On the contrary, short-term tools, such as payday loans, offer shorter repayment terms, typically until your next paycheck.
Be very attentive and clearly understand the pros and cons as your future financial well-being directly depends on today's decisions. Use the services of financial planners if personal finance is not what you can brag about.
Credit Building
Establishing a good credit score is the thing that every law-abiding borrower needs to think about. If you don't have a credit history, you are less likely to get a loan or get qualified for a credit card. It turns out into a dilemma on how to start building a credit history if you can't get credit without it.
The first option is laid upon a secured or co-signed credit card. Ask one of your relatives or friends to make you an authorized user and start building your credit. Keep in mind, once the credit cardholder fails to fulfill his contractual obligations, it may also affect your credit score.
Suppose a credit card is not an option. In that case, you may benefit from using your utility payments to establish a credit score.
Drawbacks of Dealing with Loans
Interest Rates
Borrowing a specific amount of money doesn't mean only payment of the principal amount, as the lender expects to gain interest against the lent amount. The interest rate is the cost of the principal amount fixed on a yearly basis, generally noted as an annual percentage rate (APR). Actually, paying more than you borrowed can be considered as a drawback, but on the other hand, it’s a general principle for all types of borrowings.
Getting a Loan May Lower Your Credit Score
Proper financial behavior is the main guarantee to maintain a good credit score. But your credit application may affect your credit score negatively and cause a score drop. Before approving or rejecting your credit request, the lender checks your credit score for making a lending decision. There are two types of credit checks: hard and soft, also known as credit pulls. Hard inquiries that may hurt your credit score usually occur when a lender checks your score to evaluate your creditworthiness. Using too many hard inquiries during a short time span may lower your credit rating, especially when you have a poor credit history.
Sticking in a Debt Cycle
The debt cycle, also known as a rollover, is a continuous borrowing process that induces to increase your debt by taking out new credits. Usually, this happens when you manage your money irresponsibly and spend more than you earn. The main way out of this situation can be debt consolidation. Simply combine your multiple debts into one monthly bill, negotiate lower interest rates, and you are on the right track.