A personal loan is an unsecured loan because it requires no collateral or security at the time of availing. This is why they bear a very high rate of interest due to the high risk involved. The loan can be used for any purpose like paying your credit card bills, wedding expenses, medical emergency, higher education, buy expensive gadgets, etc. So, before you sign a personal loan agreement, you need to know the several types of risks involved with personal loans which are listed below.
1. The interest rate: Personal loans are unsecured, so the rate of interest on such type of loans is usually very high. Before availing a personal loan, you should be aware of the rate of interest and also take into consideration what if you can’t repay the loan on time.
2. Early-payoff penalties: Now, this is something very unusual as the lenders charge a prepayment penalty when you close your loan before the completion of the loan tenure. So, you need to read the fine prints before you get the personal loan to know the early-payoff penalties.
3. The Insurance Pitch: When you opt for a personal loan, your bank will also offer you an insurance cover along with the loan. But that comes with an additional cost. This is offered to you to protect against “life’s unexpected events” get in the way of your ability to repay. So, if you want insurance for that purpose, you may call an agent who you trust and get a quote on general disability insurance which is generally cheaper than what is offered on your personal loan and has better coverage.
4. Unnecessary Complications: If you are opting for a personal loan, then your loan should look simple. If the lender is unnecessarily offering you cash back offers payment holidays or any other thing, this is only to entice you and you only have to pay for that. Because they never give you any benefit for free. So, when you avail a personal loan, try to understand the terms and conditions of the loan and if your lender is offering you something extra, know that they are fooling you.
5. Borrowing one debt to pay for another: You might already know that personal loans are very helpful in solving all kinds of financial problems. You can use a personal loan to pay for another debt like bills on your credit cards or home loan installments. But remember, in that case, you are landing you in a dire state with an even larger burden. So, before you avail of a personal loan to pay off other debts, you need to consider all other options.
6. Privacy concerns: All the banks or NBFCs have strict privacy regulations, though other options may be considered less formal. The privacy laws should be followed by them, but it’s seen that there are always aren’t. So, these were some of the risks that are associated with unsecured loans like personal loans. Before you avail of an online personal loan, you should be aware of these risks.