Upsides and Downsides of Bank Loans

The Covid-19 pandemic has affected many individuals and businesses around the world financially. Thus, it’s not surprising that there’s a significant number of loan applications since the pandemic hit because many individuals have lost their jobs and businesses have been closed down. 

When it comes to loans, one of the go-to places to apply for one is banks. Banks offer different types of loans that suit the needs of individuals and businesses. However, like other loans offered by credit unions and online lenders, you need to consider the pros and cons of bank loans. 

Read this blog post to have a closer look at the upsides and downsides of loans offered by banks. 

Pros of Bank Loans

Flexible Terms

Borrowers can benefit in the long term when taking out bank loans because of their flexible terms.

If you borrow money from a bank, there’s the possibility of choosing the loan’s duration and how much equated monthly installment you can pay.

You can also negotiate with the bank regarding the loan amount and its interest rate. 

Let’s say you want to take out a mortgage from a bank. You can decide to repay the loan in 15 or 25 years. 

Favorable Interest Rates

Before the beginning of the 20th century, there were a lot of unorganized lenders that provide loans to borrowers. These loans had very expensive interest rates and unfavorable collateral demands.

Thanks to banking institutions, lending has become more systematic and organized, which led to better interest rates.

Comparing bank loans to most loan products from nonbank financial companies, you’ll realize that interest rates of the former are more affordable. 

To ensure that you get better rates from banks, it’s a must to raise your credit score.

Browse the internet and read about improving your credit score to start your credit-building journey. 

Buy without Liquidity

Individuals and businesses that don’t have ready cash obtain bank loans to purchase what they need.

For a company, a bank loan can help purchase inventory or machinery to operate its business for which it doesn’t have enough capital.

An individual can use the loan to buy a house or a car for which he/she doesn’t have money. 

A bank loan is great in scope, and you can borrow a loan amount based on your income and creditworthiness.

You can use bank loans to make improvements in your way of life or drive growth for your business. 

Accounting and Tax Benefits

You can save money on taxes when you take out a bank loan because the interest on the money you borrow is deductible from taxable income.

Moreover, you can also budget and plan your monthly loan payments because most loans from banks have fixed interest rates. 

Borrowers Keep Ownership Share

A company can use a bank loan to raise funds without losing the ownership share of the company.

Compared to using a bank loan for that purpose with funding a business through raising private equity or issuing equity shares, the former is a less risky approach since the company can keep its ownership share. 

Cons of Bank Loans

Good Credit Requirements and Security Needs

It’s not easy to get a loan from a bank if you have a bad credit score.

Creditworthiness is a requirement to qualify for bank loans, and you need to build your credit to get favorable interest rates.

This is a disadvantage to some people, especially if they need to borrow money. 

Also, some bank loans require the borrower to pledge an asset as collateral against the money borrowed.

For people who can’t put anything as security, obtaining a bank loan is difficult. 

Additional Expense on Cost of Goods

If you’re using a bank loan to purchase something, you’ll pay more than the cost of that product because of the interest of the loan. 

For example, if you want to buy a laptop with a price of $1,500, and you decide to use your own $1,000 and borrow the $500 through a bank loan with an 8% annual interest rate.

It means that you have to pay an additional $40 (a total of $1,540) for the price of that laptop after one year. 

Borrowers Must Adhere to a Strict Repayment Schedule

Borrowing money from a bank requires you to adhere to a repayment schedule.

If you make late payments or fail to pay a monthly payment on time, it will be reported on your credit report and can decrease your credit score. 

Prepayment Penalties

Prepayment penalties are a feature of most bank loans.

It means that you’ll pay charges if you pay the loan in full early.

So, you need to read the loan contract carefully whether there’s a prepayment penalty provision in it and avoid paying the loan off before its maturity date. 

Takeaway

Now you know the upsides and downsides of getting bank loans. You should weigh its pros and cons before applying for one to help you make a sound decision.

Remember that this decision involves money, so you should think about it carefully.