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1. The Interest Rate

2. Early-Payoff Penalties

3. Big Fees On the front

4. Privacy Security

5. The Insurance Pitch

6. Precomputed Interest

7. Payday Loans

8. Unnecessary Complications

The Bottom Line

Personal Loans and Credit

8 Risks to be aware of with Unsecured Personal Loans

By Tim Parker

Updated October 26, 2021

Reviewed by Chip Stapleton

The factual information was verified by Suzanne Kvilhaug.

Life can throw a lot at you and there may be times in your life where you will need to borrow money to fund certain things which your cash flow will just not cover. This could be the financing of a large item or medical expense or consolidating debts, and so on. At these times it makes sense to borrow money and there are plenty of loans to choose from for those who require financial assistance. The most straightforward is a personal loan which is sometimes referred to as an unsecured loan.

You can use this open-ended loan for almost anything you need. You could pay off a credit card with high interest or fund an adoption or pay for some other cost for which you do not have the funds needed.

Before signing the agreement however, you should consider the risk that comes with specific features of loans. The following are the eight most common dangers.

Key Takeaways

Personal loans can be used to make major purchases, but also come with the possibility of risk.

The interest rates you pay are based on the score of your credit.

There could be a variety of different charges associated with the loan.

1. The Interest Rate

If you’re eligible for an individual loan isn’t a guarantee that you must accept it. Certain personal loans have interest rates below 10%, while other could be three to four times higher. The interest rates for these loans depend the credit scores of your customers. However, lenders are free to charge whatever they like as long as the rate is within certain laws.

Also, be careful when looking at Annual percentage rates (APR). The APR can be altered. Instead, look at the total amount you’ll be paying for the loan which includes fees, interest, and principal, over the life of your loan. This will give you a better idea of the total cost.

2. Early-Payoff Penalties

Can you pay the loan off early or do you have to pay a penalty or fee for doing this? It depends on the kind or personal loan you obtain—whether through banks, through peer-to-peer (P2P) lending or any other method, some lenders are more inclined to repaying the loan sooner than others. If a timely payment is essential to you (and it ought to be), take a close look at the fine print to make sure there’s no penalty is involved.

3. Big Fees Upfront

What will it cost to transfer the loan money into an account at your banks? Like the mortgage, the initial origination charges for the loan are likely to vary. You should ensure that the fees you are paying are reasonable and aligned with the market prices. There are a variety of lenders that offer different conditions, so don’t feel like you have to take the first loan you’re approved for.

4. Privacy Security

Bank and credit union loans are governed by strict privacy guidelines, however other loans may be less formal. While all lenders are required to adhere to privacy laws similar to those required for banks, there are some that don’t.

5. The Insurance Pitch

Some personal loans are accompanied by the prospect of insurance to cover the loan in the event «life’s unexpected events» hinder from your capability to repay. If you’re interested in insurance to cover this contact an agent that you trust and ask for a quote on universal disability insurance. It’s usually less expensive and provides greater coverage.

6. Precomputed Interest

Precomputed interest basically uses the original payment schedule to calculate your interest, regardless of the amount you actually paid for the loan. Simple interest considers what you owe today and then calculates your interest on that amount. Ask the lender how interest is calculated. If you hope to be able to pay off the loan before the due date, you need straightforward interest.

7. Payday loans

Payday loans are short-term personal loans that financial experts and government agencies recommend customers to steer clear of. The interest rates are very high and the terms often make people roll over the loan for additional terms.

8. Not necessary complications

A loan is a very simple item. Someone gives you money and you repay it with interest. If a business offers payment holidays, cash back offers, or any other incentive be aware that the business will not be able to make any money off the deal. The only person who could lose is you. A personal loan should be simple to comprehend. If it’s not, that’s an indication of fraud.

The Bottom Line

Because most consumers aren’t skilled in the art of arbitrage, loans tend to be stacked in favor of the lender, not the person who is borrowing. If you’re looking for the loan to satisfy a desire rather than a necessity you should consider saving up for the purchase. If you decide to go with an individual loan make sure you know the risks going in. In addition using a personal loan calculator to find the monthly payments, loan term, and interest rate that you’re confident about will to know precisely what you should ask for.

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