Unsecured Personal Loans: Common Risks You Should Know about

Need quick cash? There are various options you could choose from. But getting a personal loan, also called an unsecured loan is an ideal option. Unsecured loans could be used to tackle any emergency or expense at hand. These loans are widely taken out to pay off debts, travel, plan a wedding, etc. Also, personal loans for students are widely popular.

With a personal loan, you can pay off a higher-interest credit card, fund an adoption, or pay for some expense as well, which requires money. But before you go singing the agreement, you should consider the different risks that come with personal loans.

Interest Rate

You should not get a personal loan only because you qualify for it. Some of the best personal loan lenders provide you with interest rates below 10%, while some could be charging you three to four times higher than that.

Your credit score determines the interest rates, but the lenders can charge you however they want, within certain laws of course. Also, you should be cautious while comparing the annual percentage rates (APR) as APR could be manipulated. Take a look at the total amount you have to pay plus the interest, fees, and principal. This could help you in knowing the ultimate cost of the loan. You could use a personal loan calculator as well.

Upfront Fees

Pay attention to how much it will cost you to get the loan proceeds in your account. With a mortgage, the upfront origination fees could largely vary.

Precompiled Interest

Precompiled interest is also called precomputed interest. Using the original payment schedule, it calculates your interest no matter how much you have paid on the loan. Simple interest focuses on the amount that you owe and then calculates the interest on that figure.

Ask your lender how he is going to compute the interest. Simple interest is the best option if you plan to pay off the loan early.

Penalties of Early Payoff

See if you are allowed to pay off the loan early or is there an early-pay off penalty. Depending on the kind of personal loan, be it a bank or through peer-to-peer lending, lenders would find you paying off the loan early to their advantage. Do not forget to read the fine print closely if paying off the loan early means something to you.

Payday Loans

As the name suggests, payday loans are short-term personal loans that government financial agencies advise to steer clear of. The interest rates are very high. And quite often than not, the terms urge the people into rolling over the loan for additional terms.

Privacy Concerns

When it comes to banks and credit union loans, there are strict privacy rules, but with other sources, there is more flexibility and fewer formalities. All lenders should respect the privacy laws and concerns of the borrowers the same way banks do. But some might not have the same approach. So, make your expectations clear to your personal loan lender.


Some personal loans come with additional insurance to keep the loan safe in case of life happens – means you are unable to pay somehow. If you wish to have insurance for that, you can call a trustworthy agent and get a quote on general disability insurance. It is cheaper and comes with better coverage as well.

Excessive Complications

Loans don’t have to be complicated. The process is simple. Someone gives you money, and you pay it back with interest. If a company allows you cashback holidays, payment holidays, or other attractive packages, know that the company will keep itself safe and not going to lose money.

The only person to lose possibly is you. See that the personal loan that you are getting has simple to understand terms. If not, don’t go for it.

Final Thoughts

Compared to the borrowers, loans are usually in favor of lenders. The reason is that most consumers are not skilled in arbitrage. If you wish to have a loan for a want rather than a need, it is better that you save money for it. If you have decided to proceed with the personal loan, make sure that you are fully aware of the risks involved in it.

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