The 8 Major Risks That Accompany Unsecured Personal Loans
Everyone gets curve balls thrown at them in life from time to time. Maybe your house flooded, and you need cash for an immediate home renovation. Perhaps financing for your university fell through, and you need to cover the costs of your next semester. Many people turn to personal loans for a wide variety of reasons.
Read on to learn more about some major risks that might accompany your unsecured personal loan. Additionally, learn how you can protect yourself from these risks.
1. Receiving A Sky-High Interest Rate
It’s always a relief when you qualify for a personal loan. However, this doesn’t mean that you have to accept the first loan that’s offered to you. Your credit score largely determines your loan interest rate, but it can fluctuate lender to lender.
A good method to understand how much your loan will cost over its lifetime is to look at the APY or annual percentage yield. This is a number that’ll help you understand the total amount you’ll pay on the loan. This includes interest rates, associated fees, and principal. If you only compare the APR, annual percentage rates, then you leave yourself subject to manipulation.
2. Facing Enormous Upfront Costs
Enter into the personal loan process with eyes wide open. This will help you to not be surprised by all the associated fees that pop up. Fees may include application fees, origination fees, and other hidden costs. It’s vital to factor in these costs so you can determine which provider is offering the overall best terms.
Moreover, it’s more prudent to compare loan APRs and not just interest rates. The APR is all-inclusive and will give you a better understanding of your total sum.
3. Paying Penalties For Early Repayment
Many people are surprised to learn that they may be subject to early repayment fees on their loans. After all, you’re paying back the money you owe ahead of time, how could that be bad? Early repayment fees can raise the cost of financing, so be sure to factor that into the total cost of your loan.
It’s good to repay early and keep your balance positive. However, fees for early repayment might make that not the most cost-effective way to pay back your loan. If early repayment seems like a feasible option to you, there are certainly providers out there without this restriction.
4. Dealing With Precomputed Interest
Most likely, a more speedy repayment of your loan won’t change the interest amount payable. Precomputed interest is a method that uses the original payment schedule to calculate your interest. Therefore, it doesn’t matter how much of the loan you have repaid.
On the other hand, simple interest examines what you currently owe and will calculate interest based on that amount. If early repayment is the right option for you, consider finding a personal loan lender that offers simple interest.
5. Agreeing To Lengthy Loan Durations
When searching for the right personal loan, take a close look at your loan duration options. A longer-term loan will likely end up costing you more in the end, even if the monthly payments are smaller.
Shorter-term loans may come with higher monthly payments, but they could save you money in the end. Resist being pushed by the loan provider to take a long term loan, and consider your shorter-term options.
6. Falling Prey To The Debt Trap
Try to stay balanced and calm when searching for a personal loan. If you’re stressed about your financial situation, you might be pressured to take the first deal you get. This rushed decision could end up in an even bigger problem.
Many people are tempted by payday loans because they’re a quick and cheap source of financing. A payday loan refers to when a loan a borrower writes a postdated check to the lender for their expected payday salary. The borrower then receives that payday sum immediately from the lender. This might sound like the quick solution you’ll need.
However, these loans come with sky-high interest rates and often cause people to become trapped within an endless cycle of debt.
7. Being Persuaded By Complicated Benefits & Promotions
Let’s face it, even loan providers need advertising to hook new borrowers. This means they’ll employ a variety of methods like promotions and incentives to lure people in.
While certain incentives, like autopay, can be fantastic- don’t be blinded by all the bells and whistles being thrown at you. Try to remain impartial and look at the bottom line, which is the terms of the loan.
8. Obtaining Loan Protection Insurance From The Lender
Your loan provider may try to pitch you an insurance offer to go with your loan. If you truly believe you have a repayment risk, do your due diligence by shopping around for other insurance offers. The one offered by the loan provider won’t necessarily be the best deal out there.
If you’re in the market for a personal loan, then keep these risks in mind. Try to keep your emotions from interfering with the process of choosing the best loan provider. With a clear head, you’ll be able to identify the best loan with the right terms for your specific needs.