Advantages and Disadvantages of a Bank Loan

  Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance      Updated November 08, 2018
  Written by: Van Thompson
Advantages and Disadvantages of a Bank Loan

A bank loan can provide you with cash to fund home improvements, pay for college or take a dream vacation. And unlike riskier loans such as payday loans, interest rates are generally reasonable as long as you have good credit and make your loan payments on time. However, a loan can also harm your credit, increase your stress and even cause you to lose your property, so ensure that you can afford the loan payments and that the item you are funding is worth the risk to your credit.

Tips

  • While a bank loan offers the advantage of quick access to valuable funds, it is important to ensure that you can successfully repay the loan under the terms provided by the financial institution in question.

More Loan Flexibility

Unlike some other types of loans, a bank loan is highly flexible. After you are approved for the loan, you'll receive the money and can use it for whatever you wish. A personal loan from a family member or friend might have more flexible terms, but banks don't typically criticize personal finance choices, as family members might. If you want fast access to cash without having to account for your spending choices, a bank loan is often preferable to a personal loan. Also, bank loans tend to have significantly lower interest rates than credit cards, making them a better choice for large loans and purchases.

Faster Loan Process

A bank loan typically takes only an hour or so to apply for, and you'll have an answer about your approval almost immediately. Loans from friends and family members may take weeks as they debate the terms of the loan and whether or not they want to give you the money. Bank loans for cars or homes might be contingent upon the car or home you wish to buy and the down payment you're able to make.

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Qualifying for Bank Loans

Bank loans are relatively more difficult to get than other types of loans, particularly as banks establish stricter credit standards. For example, a family member extending you a personal loan probably will not require you to have perfect credit. However, the better your credit score is when applying for a bank loan, the more favorable your interest rate and terms will be and the more likely you are to be approved. If you're looking for a small loan, using a credit card might be a better option, especially if you use a card with a low introductory interest rate.

The Impact on Your Credit

A bank loan can negatively affect your credit, particularly if you take out a large sum or only make minimum payments. Failure to repay the loan can destroy your credit and even necessitate filing for bankruptcy. However, if you pay back your loan quickly and never miss payments, a bank loan very well could improve your credit over time.

Other Financial Concerns

If you used a car or other personal property as collateral for the bank loan, you could lose your property. A loan can also cause you unnecessary financial stress, particularly if you are already struggling to make ends meet. Before taking out a bank loan, ensure you will have enough money to pay the loan back even if you encounter unexpected financial difficulties, such as a layoff or pay reduction.

About the Author

Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.

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