Risks of Taking Out a Personal Loan

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Personal loans are a great straightforward financing option for people in a variety of circumstances. They can be used for nearly anything, are widely available, and generally offer competitive rates and terms.

But before you accept any offers, it’s important to understand the costs and risks that you might run into.

With that being said, let’s take a quick look at the costs and risks of taking out a personal loan.

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Main Risks of Taking Out a Personal Loan

Before you start looking for lenders, you should also be familiar with the risks of taking out a personal loan.

- Overborrowing: As mentioned, you should never borrow more than you need. People often make the mistake of borrowing as much as their lender allows, but this can cause you to default. So, be sure to only borrow what is actually necessary.

- Prepayment Penalties: In some cases, you’ll find that you are able to repay your debt early, which can save you a lot on interest charges; however, some lenders charge prepayment penalties to prevent this.

- Potential Loss of Assets: Most of these products are unsecured, meaning they don’t require collateral. However, if you are only able to qualify by providing collateral, be aware that defaulting may result in the loss of your valuable assets.

Ultimately, personal loans can be a great resource when you need a significant amount of cash, but be sure you’re aware of these costs and risks of taking out a personal loan before applying.

Personal Loan Costs

First, in order to determine how much you can afford to borrow, you need to understand all of the costs you may be responsible for.

- Annual Percentage Rate (APR): Your APR represents the interest rate plus any fees that your lender charges. This is the total annual cost for you to borrow the money.

- Fees: It’s important to check with your lender to understand what fees you will have to pay. Fees might include origination, prepayment, late payment, and others.

- Term: Your term is the amount of time, typically in months or years, you have to repay your personal loan. This, of course, isn’t a cost itself but will impact how much interest you have to pay.

- Borrowing Limit: Lastly, be sure to calculate how much money you need and don’t borrow more than this. Borrowing more than you need can lead to accruing debt that you can’t pay back.

Once you have these numbers, you can plug them into a personal loan calculator to determine whether or not your offer fits into your budget.