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A personal loan seems to be the safest and the most accessible method if you have outstanding expenses. A personal loan can be defined as a lump sum amount received from a bank upon making a request. This amount can be paid back at a fixed interest within a specified time, between two to five years. The receiver is free to use this amount for any purpose, though certain aspects of taking a personal loan involve risks. Here are the four main risks associated with a loan and how you can avoid them by being mindful:
Not maintaining a good credit score
There is a relation between your credit score and the interest rate you will be paying. If you are unable to maintain a good credit score, you may have to pay higher interest on the amount. With a good credit score, the lender may offer you the loan at a lower annual percentage rate or APR. So, it is important to calculate the total amount you will have to pay in all. This amount can be calculated as the principal amount, the interest and the fee. This will give you a better evaluation of taking a personal loan. An interest rate lower than 10% is preferable. Thus, it is recommended to work on achieving a great credit score to save money by qualifying for a lower APR.
Miss a payment and invite some legal trouble
Failing to repay a personal loan may drag you into some legal trouble. During the repayment schedule of the loan mentioned in the loan agreement, you get a 30-day grace period to make the payment before a missed payment is reported by the lender to a credit bureau. After 30 days of non-payment, the lender is free to report a missed payment to any number of credit bureaus. This will adversely affect your credit score as it will drop by certain points. As 60 days pass without the payment being made, your account is considered as default. After another 60 days, you will lose your account to a collection agency and you may have to consider bankruptcy.
Check if there is an early payoff penalty
On the contrary, paying off your EMIs early may also lead to a penalty. Some lenders may prefer an early payoff while others may not. So before you decide on taking the loan, it is suggested to read the details carefully to find out if there is any penalty on an early payoff of the loan.
Applying for an unnecessarily large amount
If you are eligible for a loan, that doesn’t mean you can opt for a loan of more value than how much you actually require. Taking a larger personal loan would mean you will have to pay a higher interest rate on it. Also, the repayment period will extend. And with a longer repayment schedule, you might get stuck into a debt spiral as interest can grow over the loan period. So, it is highly recommended that you use a personal loan calculator. The total amount to be repaid to the lender may include some hidden costs such as application fees. It is your own responsibility to read the loan terms thoroughly. You may even ask the lender for any additional costs included in the amount before you apply for the loan.
Applying for a personal loan in a responsible manner
As it is a matter of money, there is always some risk associated with any kind of loan you borrow. Although it is possible to get loans for unemployed people, it is often recommended you have a source of income or plan at least on how exactly it will be repaid on time. By acting responsibly, especially during the initiating process, you can save yourself from unexpected turnouts. Firstly, make a comparison of the interest rates offered by different vendors. Secondly, check for the additional fees you will have to pay. Furthermore, apply for as much as you need, not more than that. Always have a backup plan so that you don’t miss out on your installments and consider asking for an early payoff penalty if you are willing to pay off your installments earlier. Without an effective plan, you may end up in a debt spiral so think responsibly before you take this significant step.
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