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4 Risks You Need to Know Before
Taking Out a Personal Loan

A personal loan might seem the perfect solution when you're in a bind and need extra cash. However, before you take out that loan, you must know the risks involved—high interest rates, late payment penalties, and other fees that can quickly add up. So, before signing the dotted line, you should be sure that you know what you're getting into. This article will discuss the four most need-to-know risks associated with personal loans.

What Is a Personal Loan?

Because it is unsecured, a personal loan is unsecured is typically not backed by any collateral. That makes personal loans a risky proposition for lenders, which is why they typically charge high interest rates to offset that risk.

Credit unions, banks, and online lenders are the three best places to request a personal loan. Online lending platforms like MoneyAsap provide an easier and faster way to request loans from the comfort of your home.

What Is a Personal Loan Used For?

The beauty of personal loans is that borrowers can use them for almost anything—from consolidating debt to paying for significant purchases. The important thing is you plan how you'll use the money.

Four Risks That Come with Personal Loans

Now, let's talk about the most awaited portion of this article. Here are the most common risks you may face when taking out a personal loan.

High APR
One of the greatest risks of taking out a personal loan is the high interest rate. Personal loan interest rates are typically much higher than other loan types like auto or home equity loans. So, you could be paying more in interest over the life of the loan.

Late Payments
If you miss a payment on your personal loan, you'll typically be charged a late fee. Late fees can add up quickly, and they can also damage your credit score. That's why you should ensure you can make the payments promptly before considering taking out a personal loan.

High Fees
Many personal loans come with high upfront fees, which can add hundreds of dollars to the cost of the loan. Some lenders will waive these fees if you agree to automatic payments from your bank account, but it's necessary to read the fine print before signing up for a loan.

You may be offered a personal loan with a low interest rate, but pay attention to the origination fee and possibly a prepayment or early repayment penalty. Consider these fees when shopping around. Fortunately, those who have good credit scores can enjoy no-fee personal loans.

Payday Loans
Payday loans are a type of personal loan that typically come with very high interest rates. They're also typically due on your next payday, making them difficult to repay. Payday loans can quickly become a cycle of debt, so you should be careful before taking one out.

How to Lower Personal Loan Risks

Follow the tips below to minimize the risks that come with personal loans.

  • Shop around for the best interest rate. Personal loan interest rates vary widely, so borrowers should compare offers from multiple lenders before setting their hearts on one.
  • Read the fine print. Be sure to read all of the terms and conditions of your loan before signing the contract.
  • Make a budget. Before shopping around, ensure that you still have room in your monthly budget to make the payments on time.

Final Words

Personal loans are a great tool to get the money you need for a major purchase or to consolidate debt. However, you need to be vigilant of the risks before taking one out. By understanding the risks and taking steps to minimize them, you can ensure that a personal loan is right for your needs.

Harrison Jones

Author’s Bio:

Harrison has been a freelance financial reporter for the past 6 years. He knows the major trends in the financial world. Jones's experience and useful tips help people manage their budgets wisely.


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