Personal Loan

All You Need To Know About Different Risk Factors Regarding Personal Loans


Financial difficulties are a constant issue in life and can strike at any time. Your investments likely get tied up when you run into issues like house renovations, unforeseen trip plans, or medical emergencies. Banks offer no-collateral, no-security personal loans to help with such financial issues. Additionally, you may conveniently use their internet portal to apply for a personal loan. It’s crucial to realise that unsecured loans carry some risk as well. Continue reading to learn more about the potential risks of personal loans.

What is a personal loan?

A personal loan is sanctioned with little to no documentation. Additionally, it does not even require security or collateral. The money can be used for any financial purpose. You must pay it back according to the terms of the bank in simple equivalent monthly instalments over a few months. 

What is a personal loan used for?

You are free to use the money for any financial purpose like vacation, purchasing a gadget, covering medical expenses, renovating your home, financing a wedding, funding your kids’ education, etc.

How do personal loans work?

The majority of loans function similarly to personal loans. You apply for a loan, and the bank verifies your creditworthiness and then extends an offer to you. The money is deposited to your bank account when you accept it, where you can use it however you like. You must pay back the loan in EMIs, the size of which will vary depending on the loan’s term, amount, and interest rate.

Top Advantages of Personal Loans

  • Processing a personal loan takes lesser time than other loans. They are the best option for taking care of your immediate cash needs.
  • Lenders don’t have any trouble approving your loan application if you have a solid credit history.
  • Personal loans are unsecured, i.e., without security.
  • A personal loan will be beneficial regardless of the use, whether for an iPhone purchase, a vacation to Switzerland, or a house renovation. 
  • Getting affordable personal loans and making on-time repayments raises your credit score if you have bad credit or no credit history. 
  • Only a few documents are required, all of which can be filed online.

Risk factors involved in a personal loan

  1. Interest Rate

You shouldn’t accept a personal loan if you don’t need the same. Personal loans can range in interest rates from a little below 10% to three or four times more. Your credit score determines the interest rates for these loans. However, lenders can set any rate they wish within the applicable regulations. Moreover, exercise caution when contrasting annual percentage rates (APR). One can alter the APR. Instead, consider the full amount you will pay for the loan throughout its entire life, including interest, fees, and principal. 

  1. Penalties

Is it possible to repay the loan early without incurring any fees or penalties? Some lenders will be more receptive to your paying off the loan early than others, depending on the type of personal loan you obtain—from a bank, through peer-to-peer (P2P) lending, or through some other method. If you value an early payoff, as you should, be sure there are no penalties by carefully reading the fine print.

  1. Fees 

How much does a loan cost you? The loan’s up-front origination costs might differ, much like with a mortgage. Make sure to pay a reasonable and consistent upfront fee as per market rates. Do not just accept the first loan that you are qualified for.

  1. Privacy Concerns

Loans from banks and credit unions will be subject to tight privacy regulations, while other possibilities might be much less formal. While lenders have to abide by privacy standards, many still don’t.

  1. Insurance Pitch

Some personal loans will include a pitch for extra insurance to cover the debt in case “life’s unexpected occurrences” prevent you from being able to make your payments. Get a general disability insurance quotation by calling a trusted agent if you need insurance. It likely costs less and has better coverage.

  1. Precomputed Interest

Precomputed interest calculates your interest using the original payment schedule, regardless of how much of the loan you have paid off. Simple interest calculates your interest based on the amount you owe as of the current day. Make sure to find out how the lender calculates the interest. Simple interest helps to repay the loan early.

  1. Payday Loans

Financial experts and government organisations advise consumers to steer clear of payday loans, a type of short-term personal loan. People are frequently forced to roll over their loans for new terms because of the high-interest rates and restrictive stipulations.

  1. Unnecessary Complications

A loan is an easy thing to use. You receive money from someone and return it with interest. Understand that if a business provides you with payment vacations, cash-back deals, or other inducements, the business won’t lose money on the transaction. You are the sole potential loser. A personal loan ought to be easy to comprehend. If it is not, it may be a warning sign.

The Bottom Line

Loans are virtually always biased against the borrower because the majority of consumers aren’t adept at arbitrage. Consider saving up for the purchase if you are looking for a loan for a want rather than a need. Be cautious and aware of the hazards before proceeding with a personal loan. You may also make sure you know what to ask for by utilising a personal loan calculator to determine the monthly payment, loan length, and interest rate you are comfortable with.

To read more about offers of Home Loans, Secured & Unsecured Business Loans, Corporate Loans and various other loans with lower EMIs at great interest rates, visit Piramal Finance.