Risks in Personal Loan

Life is full of challenges and sometimes these challenges come in the form of financial emergencies. This forces an individual to borrow money to cover the cash crunch situation. The borrowing can be for sudden large expenses or for small expenses that have started to occur at regular intervals. Personal loans are best suited for such situations as these are open-ended loans. This means that the amount given for this loan can be used for any and everything. But this also means that the interest rates will be higher for this loan. The lender provides the loan amount as per the repaying capacity of the borrower by observing his income flows. For this purpose, he uses a personal loan calculator to calculate his EMIs.

These are the risks involved while applying for a personal loan:

1. Interest Rates: The borrower should always be aware of what can be the interest rate on his/her personal loan because this totally depends on one’s credit score. While some lenders charge 10%, others might be charging three to four times of this as per their laws. Also one should be careful while taking into consideration the annual percentage rate(APR) due to the very reason that they are manipulated. Instead, the borrower should focus on the total amount he will be paying in terms of interest, fee and principal.

2. Early-Payoff Penalties: some lenders allow to pay off the loan amount before the loan tenure completes for free while others charge penalties for the same.

3. Big fees Upfront: all the lenders, be it peer-to-peer lender, a bank or NBFC, all these charge some fees in the name of processing fees. This fee includes all the services the lender performs to avail the loan to the borrower. However, the borrower should be careful as to what amount he is paying for the same and if it is in the line with market levels or not.

4. Privacy: A borrower should choose a lender for himself/herself who is promised to keep all the information to by itself and does not share it with any third party. ICICI personal loan follows strict privacy rules while giving loans.

5. Insurance pitch: Some lenders while pitching for personal loans also offer insurance policies to protect their personal loans, it is for the borrower to realise that the premium payments will later come in the way of paying the EMIs. If anyone wants an insurance cover then he should call an agent separately.

6. Payday loans: These loans can be a short term version of personal loans that are always advised to stay away from. The reason behind this is that the interest rates are too high and force people to agree with additional terms.

Also read:- Two Words: Personal Loan