Whether you’re short of cash to pay off a higher-interest credit card, fund an adoption, unexpected home repairs or other emergency expenses, personal loans can provide a convenient solution.
Though these type of loans offer a convenient solution to your problem, they can also cause complications. Here are some risks to consider before signing a personal loan agreement.
1. The Interest Rate
Though the interest rate on personal loans depends on your credit score, lenders may charge whatever they want as long as the rate falls within certain laws. Rates can go below 10% or maybe 3-4 times higher. To better measure, the loan’s ultimate cost, look at the total amount of the loan (including interest, fees and principal) over the life of it.
2. Early Payoff Penalties
Find out if you can pay the loan off early and if there are penalty charges for doing so. Some lenders will be more favourably inclined to your paying off the loan early than others. So, read the fine print to ensure that you don’t have to pay a penalty fee if the early payoff is important to you.
3. Huge Fees Upfront
As with a mortgage, upfront origination fees for personal loans can vary widely. So, figure out how much it will cost you to get the loan money into your bank account. So, shop around from several lenders — a bank, via peer-to-peer lending, or by some other means.
4. Privacy Concerns
Banks and credit unions come with strict privacy rules, while other options may be considerably less formal. Though all lenders should respect privacy laws like those required for banks, there could be some that won’t. So, do your due diligence and find out if you have any privacy concerns.
5. The Insurance Pitch
Some personal loans may come with a sales pitch for additional insurance cover for the loan in case some unexpected events get in the way of your ability to repay. If you want insurance for this purpose, it’s probably cheaper and provide better cover to get a quote on general disability insurance from your trusted provider.
6. Precomputed Interest
This uses the original payment schedule to calculate your interest regardless of how much you’ve actually paid on the loan. So, make sure to ask your lender how the interest is being computed. If you want to pay off the loan early, then you may want simple interest since it looks at what you owe at the moment and computes the interest on that figure.
7. Payday Loans
These are a form of a personal short-term loan that financial experts and government agencies advise consumers to steer away from. These type of loans have sky-rocketing interest rates and the terms often force people into rolling over the loan for additional terms, which could easily send you spiralling down the debt hole.
8. Unnecessary Complications
If a company offers you payment holidays, cash back offers or other temptations, know that the company is not losing money on the deal. Which makes you the only possible loser. A person should be simple, — someone gives you money and you pay it back with interest. If it’s not, then that’s a red flag and you should run for cover.