Possible Risks Of Unsecured Personal Loans

By | May 11, 2017

Are you facing a severe cash crunch or an unexpected financial emergency? In that case, we’re sure that your family and friends may have suggested that applying for a Personal Loan is the best option.

If you’re apprehensive about it, keep in mind that a Personal Loan could prove to be a major boon as long as you manage it well.

Here’s why taking on a Personal Loan is a good idea:

Debt consolidation: If you’re tired of keeping track of all your debts, then a Personal Loan can help you consolidate them. Don’t worry! It really isn’t complicated at all.

All it means is that you take one Personal Loan and repay it instead of paying back multiple loans. In short, it simplifies your finances for you. You no longer need to keep a track of all those annoying EMIs.

Take a Personal Loan, clear all your existing debts and then concentrate on repaying just one single loan.

Home renovation: There are some expenses that are completely unavoidable. Renovating your house, fixing that leak in the ceiling or getting a waterproof coating on the exterior walls before the rainy season strikes are some things you can’t ignore.

If your house demands attention, you must immediately look into it. As time passes, things just go from being bad to worse. A small leak in the ceiling that requires minimum financial attention right now could turn into a major issue and blow a massive hole in your pocket.

Additional Reading: 10 Things You Should NOT Do With A Personal Loan

Here’s what you should avoid taking a Personal Loan for:

Weddings: No matter how simple you want to keep it, a wedding is usually a costly affair. After all, it is one of the most significant days of your life. There’s every chance you’re likely to give in to the temptation of making it grand.

If you’ve always wanted a fairy tale wedding, then hopefully you also have a few Fixed Deposits or other saving options for backup. Taking a Personal Loan to manage your wedding expenses should be the absolute last resort.

A lavish vacation: We understand that you love to travel. However, there are other ways of handling your vacation spends. You don’t necessarily need to take a Personal Loan for it.

This loan might look harmless now, but once you come back from your trip and that tan fades off, you’ll realise that you could’ve explored other means before opting for a Personal Loan.

You wouldn’t want a few days of fun costing you those annoying EMIs, would you? Plan ahead of time. If you’re planning to take a trip next year, you need to start saving now. Set a target according to the destination and other costs involved. Open a Recurring Deposit and start saving towards making your dream vacation a reality.

Now that you know when taking on a Personal Loan makes sense and when it doesn’t, we hope it makes your decision that much easier. But, before you decide, another important thing that you need to find out is whether your Personal Loan offer is secured or unsecured.

What’s the difference between a secured and an unsecured Personal Loan?

An unsecured loan is given to you on the basis of your creditworthiness. In this case, none of your properties are used as collateral for security. You get the loan based on your Credit Score. A good Credit History is all you need for the bank to trust you with the loan.

A secured loan, on the other hand, is one that requires you to offer any of your properties (house, car etc.) as security. In case you fail to agree to the conditions of the loan document and don’t repay on time, the bank can take away that security collateral.

Here are other differences between the two:

  • The interest rates on unsecured loans tend to be slightly higher than secured loans. Why? Because the amount of risk involved is higher for the former as compared to the latter. Since the lender doesn’t have a guarantee that you’ll pay them back, they charge heavy interest rates.
  • Compared to secured loans, unsecured loans have some restrictions on what you can use them for. You need to get the purpose of your unsecured loan approved as well.
  • The upper limit on the amount that you can borrow using an unsecured loan is generally lower than a secured loan.

After reading about the types of Personal Loans, you would probably want to go with the first option—the unsecured type. And why not? It just sounds like the better way out, doesn’t it?

Well, everything comes with its own pros and cons, and unsecured loans are no exceptions. They might sound like risk-free financial solutions to your problems, but are they really without risk? Maybe not!

Here are the possible risks of unsecured Personal Loans:

Taking prepayment penalties too lightly? Think again.

If things work in your favour and you get that promotion you were waiting for, you might think about paying out your Personal Loan in advance, right? Well, it isn’t as easy as it sounds.

While prepayment definitely is an option with most leading banks these days, the catch lies in paying extra for prepaying your loan. While some banks might ask you to pay slightly more than others, prepayment charges are mostly unavoidable anyway. If you don’t want to receive the biggest shock of your life while prepaying your loan, it’s better to enquire well at the start. It all comes down to reading the loan conditions carefully before signing up for it.

Did you check the interest rate?

Do you qualify for a Personal Loan? Yes? Great! But, should you really go in for the loan just because you’re eligible? Maybe not.

The interest rates on Personal Loan can be really tricky. Interest rates on loans are directly related to a couple of factors. One of them is the loan tenure, while the type of the loan you opt for is the other. If you’re lucky, you may be able to get an interest rate at less than 10%. However, in most cases, the interest rates could be quite high. Your Credit Score also plays a significant role in determining the interest rate on your Personal Loan.

Remember, before choosing a Personal Loan offer, you must compare the APRs (Annual Percentage Rates) as well. This is the rate that’s charged for taking a loan. As the name suggests, it’s an annual rate that’s expressed as a percentage representing the yearly cost of funds over the loan tenure.

Why do you need to be careful about APRs? Because they can be manipulated. Try getting yourself the best rate possible. Sharpen your bargaining skills and let them take over and get you a great deal.

Payday loans? Not a great choice.

One type of unsecured loan is a payday loan. You borrow a small amount on the condition that you’ll repay the it as soon as you get your next salary. The good thing about this loan is that it gives you instant access to funds, when you don’t have your salary to rely on, to take care of your pressing needs.

The bad part? The interest rates on these loans are quite high. That’s the primary reason most financial experts never vote in favour of these loans. It’s slightly riskier, since you have basically agreed to repay the entire loan amount as soon as you receive your next wage.

If things don’t work in your favour and you lose your job, it could land you into trouble. Just to be on a safer side, it’s advisable to looks for other risk-free methods of borrowing money instead of opting for a payday loan.

Precomputed interest. Ever heard of it?

In the case of precomputed interest, the interest on your loan is calculated using the original payment schedule. Basically, even if you’ve already paid a major chunk of your loan, it won’t make a difference to the interest calculations. This is bound to work against your financial planning, no matter how fool-proof you think it is.

Before signing documents, you need to ask your lender about the type of interest being applied. The reason you must opt for the simple interest technique of interest calculation is because it is calculated on what you currently owe the lender.

As you can see, unsecured loans aren’t exactly a risk-free choice. You really need to analyse two things before opting for a Personal Loan. First, whether you actually need it, and second, whether getting an unsecured loan makes more sense for you than a secured loan.

Having a goal in mind is great. It not only gives you an aim in life, but you also tend to work towards achieving more than what you already have. Goals are good, but merely adding new goals to your list won’t help.

You also need to back them up with some solid financial planning. If that means improving your investments, exploring the stock market or other savings instruments, then you must do what it takes.

Need funds immediately? Explore our Personal Loan rates today!

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Category: Personal Loans

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