An unsecured loan also known as personal loan is an open-ended loan with which the person who collected the loan, is permitted to use as he or she wills. These loans are typically general purpose loans that you can use at your discretion for things like consolidating debt or paying for an unexpected expense or small home improvement project. This type of loan is harder to access than credit cards because of its stringent rules and criterion for qualification. It comes with a number of risks, especially when not smartly used. In spite of the freedom that comes with having accessed the loans, its attendant risks are also not divorced from it.
Below are the risks associated with unsecured personal loans
An origination fee is an upfront fee charged by a lender for processing a new loan application, used as compensation for putting the loan in place.
Origination fees are quoted as a percentage of the total loan and are generally between 0.5 and 1% on mortgage loans in the United States.
Fixed interest rates
Unsecured personal loans sometimes have low interest rates but at times the interest can be very high. The interest rates on these loans depend on your credit score, This is because the interest rates on a loan is exclusively within the power of the lender to set , provided it does not defy the stand of the law guiding it.
Privacy concerns also constitute a great concern to the borrower, since credit unions and banks do not play by the privacy rules. This act of defiance is always to the detriment of the borrower. Learn more.
This method determines the interest on a loan collected based on the original amount paid for. Unlike simple interest that uses the amount owed today to calculate the intetest.
The insurance pitch
Some personal loans will come with a sales pitch for additional insurance to protect the loan in case “life’s unexpected events” get in the way of your ability to repay. This also poses risk to the borrower.
Pay day loans
A payday loan is a type of short-term borrowing where a lender will extend high interest credit based on a borrower’s income and credit profile. It makes it risky for the borrower.
This happens when companies or credit union give out enticements in the form of cash or other form, and because the company is not interested in frivolities, they must profit from the business while the borrower bears the brunt. This is risky and any personal must be kept simple enough with all the rules pointed out.
Pre-pay off penalties
Depending on which type of personal loan was collected, early payment might be allowed or disallowed and punishable. Hence, the fine print must be read and all terms and conditions must spelt out and agreed upon.
Unsecured personal loans come with its risk as mentioned above, hence apt attention must be given to knowing whether or not you can bear the risk and repay the loan when due. The aforementioned points are instrumental to knowing what an individual is venturing into, with all that said it is now left for the borrower to decide.