The Disadvantages of a Bank Loan

Taking out a loan from a bank provides you with immediate funds, which you can then repay over a certain period of time. However, it also comes with several disadvantages. Whether a bank loan is suitable for you depends on many factors, including your own personal financial circumstances.

Cost

If you borrow funds from a bank, you have to pay it bank with interest. The interest rate that applies to you depends on your lender, your credit rating and the loan product you choose. If you have poor credit, the lender may view you as a risky borrower and charge you a high interest rate, increasing your cost of debt. Interest rates may also fluctuate over time so your interest expense may go up and down. Other loan expenses include other charges, such as administrative charges and late payment charges.

Flexibility

A bank loan usually requires that you make regular repayments toward the borrowed amount. You can't change the schedule of the payment, and you may face serious consequences if you don't follow it. If you want to pay off the loan before the end of the loan term, the lender may charge you a prepayment penalty. If you take a large loan for a business, you may also have to comply with the loan's terms and conditions. For example, you may have to provide quarterly management information to the lender.

Risk to Credit Score

If you fail to meet your loan obligations, the bank can report this to the credit reporting agencies, lowering your credit score. A low credit score makes it difficult for you to get lenders to extend funds to you in the future. Because landlords often check credit scores, a low credit score may also make it difficult for you to secure a rental property. Your credit score also determines the amount of deposit you need to pay for telephone, electricity and natural gas service.

Risk to Asset

In some cases, the lender may require that you secure the bank loan against a personal or business asset. This means that the lender can take possession of the asset if you fail to meet your loan obligations. Lenders usually charge a lower interest rate on secured loans, but you risk losing your asset if you face financial difficulties that make the loan payments unaffordable.