Advantages and Disadvantages of a Bank Loan

Taking out a bank loan has its pros and cons.

Taking out a bank loan has its pros and cons.

If you're running short on cash or you need to borrow money for a major purchase, taking out a bank loan may be the answer. Bank loans generally offer flexible repayment terms and they're less expensive than payday or cash advance loans. On the other hand, borrowing money from a bank does have some drawbacks. Before you apply for a bank loan, it's helpful to consider all of the potential advantages and disadvantages.

Make Expensive Purchases

One of the biggest advantages of bank loans is that they make it possible to purchase big-ticket items. Unless you've got a sizable nest egg already tucked away, chances are you'll need a bank loan if you and your spouse want to buy your first home, make renovations to your existing home or upgrade your cars. Bank loans can also come in handy if you have a lot of high-interest debt you want to consolidate or if you need to pay for medical expenses that your insurance doesn't cover.

Better Rates

A second benefit of borrowing from a bank is the money you'll save on interest. You could take a cash advance from your credit card, but you'll likely have to pay a fee for borrowing the money. On top of the fees, credit card companies typically charge much higher interest rates on cash advances than purchases. Payday loans are another option if you need cash fast, but the Federal Trade Commission warns that these types of loans can carry interest rates nearing 400 percent. Bank loans, on the other hand, typically feature rates of 10 percent or less, depending on the type of loan you get.

Long-Term Costs

If you need money for a big purchase, borrowing from the bank typically means you'll have more time to repay what you owe. Home loans, for example, usually have repayment lengths ranging from 15 to 30 years. Car loans last for a shorter period of time, but you still typically have multiple years to pay off your vehicle. The downside of taking longer to pay off a bank loan is that you'll end up paying a significant amount in interest.

Stricter Eligibility Requirements

Applying for a bank loan doesn't guarantee you'll get approved. Compared to payday lenders or title lenders, banks have much higher standards when it comes to qualifying for a loan. Your credit score is one of the biggest factors banks use to determine whether to lend you money. The lower your score, the harder it may be to get approved. The bank will also look at you and your spouse's income, how much debt you owe, your total assets and the value of any property you're planning to use as collateral.


About the Author

Rebecca Lake is a freelance writer and virtual assistant living in the southeast. She has been writing professionally since 2009 for various websites. Lake received her master's degree in criminal justice from Charleston Southern University.

Photo Credits

  • Hemera Technologies/ Images