Unsecured personal loans are very convenient since you can get them almost in an instant without the need to offer up a collateral. Creditors may not even look at your credit history to get your loan request approved.
Personal loans certainly have trade-offs for being convenient. Here are some of the risks you face in getting unsecured personal loans.
1. High interest rates
Personal loans are easily accessible because they’re offered with higher interest rates compared to other loans. This is due to the fact that lenders take on higher risks in offering loans to people with a history of not complying with monthly repayments.
Interest rates also vary according to your credit rating. Those with good credit standing get to enjoy lower interest rates. The risks of unsecured personal loans are higher on people with a bad credit rating.
Payday loans are another matter. They have sky-high interest rates which you need to pay right away unless you want to incur more debt. This type of unsecured loan is risky although it is very convenient and easy to acquire.
When looking for an unsecured personal loan, don’t just compare them using their annual percentage rates (APR). Some lenders manipulate this value to make their offers cheaper to the untrained eye. Instead, look at the overall loan you have to pay, as well as the monthly repayments, throughout the term. This computation already includes all the fees, interest rates, and other charges your lender may add.
2. Getting penalized for advanced payments
Some lenders will allow you to repay your debt earlier than the agreed period without asking for additional charges. Some creditors don’t allow this. Those who do may require you to pay a penalty fee for doing so.
The extra amount you pay every month, in this case, is deducted from your balance, allowing you to pay off your debt earlier than expected.
The option for advanced repayments is an important factor you should look into when seeking unsecured loans. Read the fine print to ensure you won’t get penalized for paying your debt early.
3. Privacy issues
While most lenders protect your personal information in accordance with the regulations enforced by the government, there are still a few who handle sensitive data irresponsibly.
These lenders usually hide their policy of sharing information to third-party organizations in the fine print. Who reads them anyway?
When you find your email getting spammed with ads and offers you didn’t subscribe to, it’s already too late. This risk of getting unsecured personal loans can be avoided if you take time reading the terms and conditions your lender present before clicking that ‘I agree’ button.
4. Large fees
Short-term, unsecured loans are notorious for charging extra fees. Initiation fees, administration fees, monthly charges, and all sort of costs you don’t know the purpose of may be added to your loan. Add these to the loan interest and you’ll be paying around 50% more than the amount you borrowed.
Remember that personal loans are meant to be paid in the shortest time possible to avoid incurring large fees.
5. False sense of security
Another risk of unsecured personal loans is the illusion that you’re not losing anything because you didn’t surrender any collateral to get the loan. You still have your house, your car, and other valuable possessions with you. This thinking sometimes makes people careless in getting unsecured personal loans.
6. Thinking you’re paying less
You’re paying only a tenth of the amount you borrowed every month. It’s not that hefty of a sum and it’s within your monthly budget, so everything’s good.
This is one of the risks of getting unsecured personal loans that people often overlook. You may think you’re paying less when in fact, when you look at the bigger picture, you’re paying way more than the amount you borrowed.
7. Memberships and insurances
Some unsecured personal loans include discounted memberships to certain financial groups. Some of the benefits you’ll receive from being a member include legal counsel, assistance for debt reviews, emergency medical services, last will and testament, and other things you may not need at the moment.
This membership obviously doesn’t come for free. Fees may vary, but the bottom line is you’ll be paying extra which may not be necessarily helpful to your situation.
Some creditors may pitch insurance protection you can avail together with your loan. Think hard before grabbing what they call a ‘limited offer’. You may be better off calling a separate insurance company that will give you better coverage for a more affordable price.
8. Complex computations
Getting a loan and repaying it should be easy and straightforward. Risks of getting an unsecured personal loan increase as more variables like complex computation and ‘discounts’ come into play.
Remember that creditors are into this business and they will not let you pay less than what you owe. If you encounter a lender that offers a lot of so-called discounts or payment holidays, be careful. They’ll possibly look for other ways to get the rebate back.
Personal loans are convenient and easy to acquire. However, the disadvantages anchored with this type of loan may negate its beneficial effects if you don’t know how to handle your money.
The risks involved in getting unsecured personal loans are high and it can even bury you deeper into debt when mismanaged. Go for this option as a last resort to resolve emergency expenses.