Personal Loans Let You Borrow for Any Purpose – Is That a Good Thing?
With financial inclusion becoming a thing, more Nigerians are begging to borrow personal loans for a number of purposes.
According to Statista, consumer lending in Nigeria is put somewhere around $64.81m in 2022.
Personal loans, which are short-term in nature, are popular because they provide borrowers with access to fast cash in the event of an emergency.
In most cases, borrowers do not fully understand how these loans work or whether they are financially able to afford them.
What is a personal loan?
A personal loan is an amount of money you can borrow to use for a variety of purposes. For instance, you may use a personal loan to pay for home renovations, or plan a dream wedding.
Personal loans can be offered by banks, credit unions, or online lenders. The money you borrow must be repaid over time, typically with interest. Some lenders may also charge fees for personal loans.
Understanding personal loans
Personal loans allow you to borrow money for any purpose and then repay those funds over time. Personal loans are a type of installment debt that allows you to obtain a lump sum of funding.
For example, you might use a personal loan to cover moving expenses, medical bills, wedding expenses, home renovations or repairs, funeral costs, vacation costs, or any other unexpected expense that may arise.
These loans are different from other installment loans—such as student loans, car loans, and mortgage loans—that are used to fund specific expenses like education, vehicle purchase, and home purchase.
Types of personal loans
Personal loans generally come in two types, secured and unsecured loans, although other variants of this kind of loan exist.
The type of loan that works best for you depends on factors including your credit score and how much time you need to repay the loan.
Unsecured personal loans are loans that aren’t backed by collateral, such as your home or car. This makes them riskier for lenders, causing them to charge a higher interest rate.
Secured personal loans on the other hand are backed by collateral which the lender can seize if the borrower fails to repay the loan. Examples of other secured loans include mortgages (secured by your house) and auto loans (secured by your car title).
Some banks and credit unions let borrowers secure the loan with personal savings or another asset.
Secured personal loan rates are typically lower than unsecured loan rates because they are considered less risky for lenders.
Other types of personal loans include:
- Fixed-rate loans
- Variable-rate loans
- Debt consolidation loans
- Co-signed and joint loans
- Personal line of credit
- Buy now, pay later loan
Where can you get a personal loan?
The first place to look for personal loans may be your current bank or a credit union. However, loan apps in Nigeria have liberalised the loan application process, making it possible to access loans in minutes.
With loan apps, you can apply electronically, get a decision in minutes and, in some cases, get funding in as little as five to 15 minutes after loan approval.
When comparing personal loans in Nigeria, whether online or offline, pay close attention to the details. Specifically, consider the following:
- Interest rate
- Fees
- Repayment terms
- Borrowing limits (minimum and maximum)
- Collateral requirements
You can check your credit report for free at nairaCompare.
It’s also helpful to check the minimum requirements to qualify for a personal loan. Different lenders have different requirements when it comes to giving out loans in Nigeria.
Applying for a personal loan
Getting a personal loan in Nigeria is similar to applying for a credit card.
You’ll need to enter your personal information, your financial information, and the details about your desired loan.
Before approving you, the lender will run a hard credit check, which may temporarily lower your credit score. Your financial picture and credit score are used by the lender to set your interest rate, loan amount, and terms.
You’ll receive personal loan funds all at once and begin paying them back immediately.
Your payment will be the same amount every month until your loan is paid off: a portion of your principal, plus interest charges.
The good thing about personal loans
Personal loans can offer benefits over other types of loans. Below are a few advantages of using this type of financing over other options.
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One lump sum
Because you get the loan payment all at once, it can be easier to make a large purchase, consolidate debt or otherwise use the loan all at once. Plus, you’ll get a fixed interest rate and predictable monthly payment, making the loan easier to manage.
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Quick access to funds
Personal loans generally have fast approval times and payment times, making them useful for emergencies or other situations where you need money quickly. Some personal loan lenders can deposit the loan proceeds to your bank account in a couple of minutes or by the next day.
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No collateral required
Unsecured personal loans don’t require collateral for you to get approved. This means you don’t have to put your car, home, or another asset up as a guarantee that you’ll repay the funds.
If you cannot repay the loan based on the agreed-upon terms with your lender, you’ll face significant financial and credit consequences. But unlike a secured personal loan, you don’t have to worry about losing a home or a car as a direct result.
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Lower interest rates
Personal loans often come with lower interest rates than other forms of credit like credit cards. As of July 2022, the average personal loan rate was 10.28 percent, while the average credit card rate was 16.80 percent.
Consumers with excellent credit history can qualify for personal loan rates of around 10.3 percent to 12.5 percent. You may also qualify for a higher loan amount than the limit on your credit cards.
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Flexibility
Some loans can only be used for a certain purpose. For example, purchasing a vehicle is the only way to use the funds if you take out a car loan. Personal loans can be used for many purposes, from consolidating debt to paying medical bills.
A personal loan can be a good alternative if you want to finance a major purchase but don’t want to be locked into how you use the money. Check with your lender on the approved uses for the loan before applying.
- Easier to manage
A personal loan with a single, fixed-rate monthly payment is easier to manage than several credit cards with different interest rates, payment due dates, and other variables.
Borrowers who qualify for a personal loan with a lower interest rate than their credit cards can streamline their monthly payments and save money.
Downsides of personal loans
Personal loans can be a good option for some, but they are not the right choice in all situations. Here are a few negatives to consider before taking out a personal loan.
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Interest rates can be higher
Interest rates for personal loans are not always the lowest option. This is especially true for borrowers with poor credit, who might pay higher interest rates than credit cards or a secured loan requiring collateral.
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More eligibility requirements
In situations when you are taking an unsecured loan, personal loans can have more strict requirements than other types of funding options.
This also applies if you have poor credit or short financial history. Fewer lenders will be available to you. Furthermore, some lenders don’t allow co-signers, which can be used to strengthen your approval odds if you have a minimal credit history or your credit score is low.
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Higher fees and penalties
Personal loans may come with fees and penalties that can drive up the cost of borrowing. Some loans come with origination fees. The fees, which cover loan processing, can either be rolled into the loan or subtracted from the amount disbursed to the borrower.
Some lenders charge prepayment penalties if you pay the balance off before the end of your loan term. Before applying, review all fees and penalties of any personal loans you are considering.
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Additional monthly payment
With a personal loan, you add another monthly payment to your bill. If you are not careful, a personal loan can lead to loan term issues with your budget if it’s not accounted for when you take out the loan and making the monthly payment causes you to overdraw your account and send your budget into the red.
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Increased debt load
Personal loans can be a tool for consolidating debt, but they do not address the cause of the debt. Paying off your debt with a personal loan frees up your available credit limit.
This allows overspenders to rack up more charges rather than free themselves from debt.
Personal loans: yes or no?
With all of this information in hand, how then do you decide whether a personal loan is good for you or not?
Yes, personal loans are known to be attractive options if you need quick cash but you need to discern whether a personal loan might make sense for your situation.
In summary, personal loans are a good thing if;
- You need the funds quickly.
- You have a good credit score.
- You want to pay off high-interest debt
- You’ll use the funds toward necessary expenses
On the other hand, if you fall under any of the categories below, then personal loans are not good for you.
- You don’t have a viable purpose for the funds
- You have a habit of overspending
- You can’t afford the monthly payments
- You don’t need the money urgently
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