Pros and Cons of Taking a Loan to Fund Your Side Hustle

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Updated: February 22nd, 2024

As the adage goes - you have to have money to make money. So, what do you do if you have a brilliant idea for a side hustle with little to no money to get it off the ground?

One option that many budding entrepreneurs explore is taking a loan to start their new business. Unfortunately, if you're a new business owner, you're unlikely to qualify for a business loan since banks typically only give business loans to companies that have been operational for at least two years and are financially sound.

You can consider using a personal loan to fund your side hustle. If you've considered this option, let's examine the pros and cons.

Pros of Taking a Personal Loan

Securing a personal loan is easy

A wide range of personal loans is available from banks and other lenders. While securing a personal loan with a bank requires a high credit score, you can get no credit check loans from other lenders.

The application process is quick

Usually, you can get no credit check loans guaranteed approval quickly. While banks might take up to a week to process your application, other lenders can process it quicker, and you can receive the funds within twenty-four hours.

Personal loans are versatile

When taking a personal loan from a bank, you may be required to give some information about what you plan to use the loan for. This will determine whether you get the loan or not. However, lenders do not require this information; hence you may use a personal loan for anything without needing approval.

Depending on the loan, you don't need to provide collateral

Since starting a new business is a risk, albeit a calculated one, you may be reluctant to risk losing an asset if required to provide collateral.

Cons of Taking a Personal Loan

Interest rates are high

The interest rate you will be charged on your loan is based on your credit score. If your score is low and you apply for a no-credit-check loan, the interest rate will be higher than a loan from a traditional lender like a bank.

It May lead to a cycle of debt

Since interest rates on bad credit loans are high, you may find yourself in a cycle of debt, where you borrow money to repay your loan and then have another debt to repay.

You can damage your credit score

If you have a good credit rating, securing a loan with favourable terms and then struggling to repay the loan will hurt your credit score. If your credit score is already low, you may damage it further.

There's a limit to how much you're permitted to borrow

Unlike business loans that offer a large amount that you can use as capital, personal loans are usually minimal, especially if you need to go the no-credit-check route.

Photo by Karolina Grabowska

Types of Personal Loans

Before applying for a personal loan, it's a good idea to find out your credit score. Basically, you want to apply for loans you are eligible for. While bank loans are the best options since they come with lower interest rates and better terms, you need a good credit score to apply.

The other option for folks with a low credit rating is to apply for bad credit loans. These loans are ideal for folks with poor credit scores and don't require a credit check. Popular bad credit loans include:

Payday Loans

To apply, you must be over eighteen and provide the following:

Proof of income
Bank details
Phone number
Proof of address
Valid identification document

The amount you're eligible for is based on your income. You can apply for a Payday loan online or at the lender's storefront. The application process is simple, and you will be notified almost immediately if your application is successful.

If you're applying at the lender's premises, you may receive the amount in cash, but if you apply online, the funds will be deposited into your account on the same day. While applying for a Payday loan is easy, the terms are tight - you typically have to repay your debt within two to four weeks. In addition, the interest rates are high and usually include fees.

Pawn Shop Loans

A pawn shop loan is a secured loan that requires you to provide collateral. We advise considering this loan type only if you have a valuable item (collateral) you're not using. Pawn shops accept personal property like musical instruments, jewellery, electronics, and power tools.

The steps in applying for a pawn shop loan are as follows:

Find an item that you’re not using and take it to the pawnshop
Allow the pawn shop dealer to evaluate your item for value
The dealer will offer you a loan based on about 25% - 60% of the item's value
The dealer will let you know the interest rate and terms

Like a Payday loan, pawn shop loans also carry high-interest rates and short payment terms. Additionally, they may attract storage and insurance fees.

Use Your Credit Card

If you'd prefer to avoid a new loan, using your credit card is an easy and convenient option. This is particularly useful if you use internet banking, as you can link your credit card to your banking app and transfer funds into your checking account.

For example, you can transfer the money to your check account and withdraw it at an ATM if you need cash. Alternatively, you can withdraw from your credit card if you do not do mobile banking. You will need a pin code on your credit card, which you can set up online or with the credit card company in person.

One of the benefits of using your credit card is that you will always have revolving credit to meet your business needs. However, the amount you can withdraw or transfer is lower than your swiping amount. In addition, to avoid high-interest charges, you must repay the amount you spent within the billing cycle.

References

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Pat Walls

I'm Pat Walls and I created Starter Story - a website dedicated to helping people start businesses. We interview entrepreneurs from around the world about how they started and grew their businesses.

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