Wednesday, 5 April 2017

Taking a Personal Loan? Make Sure You Know the Associated Risks

It is not uncommon for the people to take personal loans for all kinds of things these days. They take easy personal loans for buying a car, house, or even to manage emergency expenses.
In most cases instant personal loans are a good way to get a large amount of cash in a small time. However, many people are unaware of the potential risks that these loans have. The following are some of the top ones that you must know about:
1. Collateral Repossession
Personal loans can be of two types- unsecured and secured. In the former you don’t have to provide collateral, but in the latter you do. For instance, you can get a secured personal loan by offering your house as collateral. This makes the loan “secured” as the lender holds the rights of the property and can seize it if you are unable to repay the loan in the future.
Many people choose a secured personal loan over unsecured personal loan because it usually has a lower interest rate. However, there is a risk of collateral repossession too. Thus, if you don’t want to put your house or any other asset at stake then it’s better to get an unsecured personal loan. You may have to pay more in the form of higher interest, but it is at least safer this way.
2. Early-Payoff Fees
Say you took a personal loan for a new house at a tenure of 10 years. However, after 5 years you land an excellent job and are able to pay off the loan before the actual ending of the tenure. You approach the bank and discuss the same, only to be informed that you will have to pay a hefty fine for that. Sounds absurd, right?
You would think that the lenders would be rather happy to have their loanees pay off their loans sooner than the actual due date. However, truth is that when you decide to repay a loan sooner it is financially counterproductive from the lender’s perspective. This is because they won’t be able to receive the interest amount that you would be otherwise paying if you didn’t repay the loan prematurely. Thus, before you take a personal loan it is important that you discuss about the early-payoff situation. There may be some lenders who won’t charge for prepayment of loans and it may be a good idea to get your loan from them.
3. Bad Personal Loans
Is there such a thing as a “bad personal loan”? Actually, yes, there is!
Small personal loans have become so accessible to the people today, especially with the popularity of P2P lending and attractive interest rates, that they are used for almost everything today. From vacations to marriage ceremony expenses, the reasons galore. However, that’s exactly where the problem lies.
Despite how convenient personal loans are you must get them when absolutely necessary. Otherwise they can lead to a huge debt which can result in CIBIL dispute or your name being added to the loan defaulter list. Your life can also become stressful when you have to pay high EMIs every month. Thus, if you can do without a personal loan in a situation then you should. If needed, you can take a loan from your friends or family instead, which is a lot better than approaching a bank.
4. Damaging Credit Score
Before you apply for a personal loan, or rather any kind of loan, it is important that you check your credit report first. Only if your credit score is high you should go ahead and apply for the loan. If your score is below average, then applying for a personal loan can cause even more damage. In fact, it is possible that your score drops so low that to improve credit score again you have to work for many months. Thus, it is better to withhold your application until you are able to increase it to an appropriate number.

Personal loans are often akin to a glimmer of hope for many people. However, it helps to know the risks they are associated with. Be sure to keep the above mentioned points in mind next time you apply for a loan. It might save you a great deal of time and energy later on. 

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