Advantages & Disadvantages Of A Bank Loan


When individuals or businesses need to fund a purchase or need cash for any reason, they often turn to a bank loan. The idea of getting a bank loan is one of the cornerstones of the American economy, and it is something you should consider closely before signing the paperwork. Is a bank loan right for you situation? The only way you can be sure is if you understand the advantages and disadvantages of a bank loan.

Get The Cash You Need

The biggest advantage of a bank loan is that you get the cash you need for your situation. If a person is looking to remodel their house, then a bank loan is a great way to get the funding they need. When a business wants to launch a new product, a bank loan will make sure that the funding is in place to get that new product off the ground.

Help Your Credit

The act of being approved for a bank loan will have an immediate impact on your credit. Even if that impact is initially negative, it will turn to positive after making your first few payments. One way to help improve your chances of getting approved for a mortgage is to get a series of smaller bank loans and pay them off early or on time. This will improve your credit score and help to enhance your credit history.

You Pay More Than The Purchase Price

A bank loan adds interest to the principal balance, and that interest ensures that you pay more for your purchase than if you had used cash. For example, if you get a bank loan to buy a $2,000.00 hot tub, then you will actually be paying the $2,000.00 and whatever the interest is when the loan is finally paid off. If the interest payments add up to $700, then you would have paid %2,700.00 for a $2,000.00 hot tub.

A Bank Loan Is A Long-Term Risk

When you first get your bank loan, your good job will make sure that you have the money each month to make your payments. If you lose that good job while you are still paying off your loan, then your inability to make payments will severely damage your credit.

You Could Lose Your Collateral

Some bank loans require collateral to be approved. Collateral is property that you own that is used to secure the loan if the bank is not comfortable giving you a loan based on your credit. If you default on the loan, the bank will take the collateral and sell it to recover its money.

If you feel it is possible to save up for whatever item or service you want to purchase as opposed to using a loan, then this might be a better option. A bank loan will make sure that you get the cash you need right now, but the commitments that come with a bank loan could come back to haunt you.