Pros & Cons of Borrowing Money From a Financial Institution

Individuals and businesses both commonly borrow money from financial institutions, such as banks and credit unions. In fact, the purchase of many big-ticket items, such as homes and new cars, all but require that the buyer to take out a loan. However, there are alternatives to lending from financial institutions. For example, a borrower may choose to take out money from a private source, such as a family member or a semi-legitimate professional lender.


One of the benefits of borrowing from a financial institution is that it has likely issued an enormous number of loans before, meaning that the process is familiar to it. A well-respected lender will be able to explain to you, in clear language, exactly how the loan will be structured, how much you will pay and any other conditions of the loan. In addition, you will likely be provided with copies of all loan documents.


Nearly all financial institutions will charge you interest on any money that you take out. The amount of interest that you pay will depend on the strength of your credit history. If you have good credit, the interest on the loan will be relatively low; if you have bad credit, the interest on the loan will be relatively high. While a professional lender will likely charge you interest, it is less likely a family member will.


Perhaps the greatest advantage of borrowing from a financial institution is that most such institutions are reliable and trustworthy. If a lender is widely respected, it is safe to assume that it will stick to the terms of the contract. A financial institution can be expected to know the law and to operate within its parameters. A family member or a loan shark may stray outside the law, whether intentional or unintentionally.

Rigid Terms

Unlike your Uncle Wally, a financial institution will seldom let you make a payment a few days late without charging you a penalty. In addition, if you default on a loan, you can expect the financial institution to bring to bear its resources to collect on the debt. If the institution refers your debt to its collection department or an outside agency, expect your credit rating to go down and to face harassment from creditors.