Risks and Dangers of Taking Personal Loans

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In certain circumstances when you need huge amounts of money urgently, personal loan looks like a good option to consider. Generally, personal loans indicate requiring an amount that you cannot pay in short-term. If you could pay it, credit card is a better option as you can pay off the entire outstanding amount at once.

These days, with the easy availability of credit, people are rushing out to get a personal loan irrespective of the genuine requirement. After taking this large debt, they realize that they have to forgo a portion of income for several years. But what makes people to get into this debt?

This might be due to the number of calls, SMS and personal visits of lenders that desensitize you to take debt. They make you feel it is ‘ok’ to take personal loans. But do you know? Personal loans unlike credit cards cannot be paid off in full even if you have money to repay it. Later, in course of time, rather than pay-off it feels better to continue the loans. This inculcates a habit of living in debt.

So, it is advisable to save well in advance for an anticipated future expenditure. However, if the expenditure was unexpected or funds are inadequate at the time of compulsion, you may consider taking a personal loan only after understanding the risks and dangers associated with it. Before that, let us see the features of personal loans.

Features:

Easy to avail cash in need: Getting a personal loan is becoming fast today because it is unsecured. Loans are approved within in a short duration of time as processing time is very less. In some cases, you can get the personal loan even within 24 hours. So, this type of loan benefits the borrower when there is a medical need.
No collateral required: As most of the personal loans are unsecured loans, you need not provide collateral or security to the lender. While there is certain process for verifying the eligibility criteria, the required number of documents for submission are very less when compared to those of home loans and car loans.

Risks and dangers of taking personal loans:

High interest rates: As personal loans don’t need any security or collateral, they are regarded as highly risky by the lenders. In order to mitigate lenders’ risks, these loans carry high interest rates. The interest rate could be anywhere between 15% and 30% depending on the credit profile, income and employment.
Extended repayment tenure: When compared to home loans, the repayment tenure of personal loans is shorter, but when compared to the credit card payment, it is longer. These loans, though of small amounts are not given for a period more than five years. This leads to high amount of monthly payments (EMIs). However, even if you have more money at some time, the high prepayment penalty fee which discourages early prepayment is also a risk for the borrower. So, you must go through the terms and conditions for any additional charges or penalties.
Pressure on loan recovery adds to anxiety: Continuous phone calls regarding overdue payment disturb your mental peace. More often, when you are in default, you will be in legal trouble for repayment obligation. So, failure to repay your loan will not only affect your credit rating but will also get you in to legal trouble.
Dangerous addiction: If you are addicted or continuing to take more loans without a real need or compulsion, you are certainly getting into a dangerous addiction, thus, may end up in a high amount of debt. Moreover, when you take a personal loan, you will get a deviation in your personal financial situation which remains a black mark to your reputation.
Not a substitute for being financially well organized: If you have taken a personal loan, it means that you have not done things like – planning for unexpected financial obligation, risk reduction by taking insurance policies and saving by living below means. Till you repay your loan amount you cannot maintain a better financial situation.

Things to consider while taking personal loans:

Opt for personal loan only in case of emergency like accident, health expenses, etc.
Borrow as little as possible even if you are approved for a larger loan amount. Don’t borrow more than you need even if you are offered high amount. In case, if you need Rs.70,000 then take only Rs.70,000 and not Rs.1.5 lakhs as because it is being offered.
Don’t consider to take loans for the purpose of consumption, vacation, buying electronic goods, etc.
Borrow loan based on how much you can spend on repayments every month.
Compare interest rates. Use Internet to find cheapest loans.
Avoid rushing into loan contracts.
Keep EMI as small as possible to prevent major reduction in the future to your monthly available income.

Finally, one must ensure that, personal loan when taken must be repaid on time. Always remember that, taking personal loans results in burdening yourself with high interest debt. So, if you wish to borrow only a small amount and you can pay back within a short period of time, credit card may be a better option to pay off in full at any time without incurring early repayment charges. Even though it may be of higher interest rate, it will be a better option.

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