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8 Possible Risks of Unsecured Personal Loans

personal loan

Personal loan is also the most opted as it is an unsecured loan. There is no need for any collateral, or security for taking personal loan. There is very less risk factor involved in personal loan in comparison to other types of loan which requires collateral security.

This open-ended loan can be used for pretty much any purpose you want, from paying off your higher-interest credit card, fund an adoption to clearing off other expense for which you lacked the necessary funds.

Prior to signing the agreement however, you should consider the risks linked with certain aspects of these loans.

  1. The Interest Rate

Just because you qualify for a personal loan doesn’t mean you should take it. Some personal loans come with interest rates well below 10%, while others may be three or four times higher. Your credit score determines the interest rates on these loans though some lenders may have different charges, provided the rate falls within certain laws.

You have to cautious when comparing annual percentage rates (APR), as they can be manipulated. Instead, check the total amount payable on the loan which includes the interest, fees, and principal amount of the loan. That’s a better measure of the loan’s ultimate cost.

  1. Early-Payoff Penalties

Depending on the kind of personal loan you get either from a bank, or any NBFCs, or any other other means, you will find some lenders will be more favourably inclined for you to pay off the loan early than others. If early payoff is important and possible for you, then make sure to read the fine print closely so as to avoid large penalty.

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  1. Privacy Concerns

All the Bank or NBFC loans comes with strict privacy regulations, though other options may be considerably less formal. The privacy laws should be respected by all the banks and financial institutions, its seen that they always aren’t.

  1. Big Fees Upfront

There can be a number of different fees attached to the loan.

Similar to a mortgage, upfront origination fees for the loan also can vary widely.

  1. The Insurance Pitch

Often personal loans will come with additional insurance to protect the loan in case any eventuality, which can affect your ability to repay. Buy any such insurance from a trusted or reputed agent from where you can get a quote on general disability insurance. It would probably turn out cheaper and with better coverage.

Additional Reading: 10 Things to Pay Heed to when taking a Personal Loan

  1. Precomputed Interest

Generally, a precomputed interest is decided on the original payment schedule to calculate your interest irrespective of how much you actually pay on the loan. Simple interest looks at what you owe today and computes your interest on that figure. Make sure to ask the lender how the interest is being computed. Simple interest is preferred If you hope to pay off the loan early.

  1. Payday Loans

Payday loans are a form of short-term personal loan which any financial expert or government agencies advise consumers to avoid. Their interest rates are relatively higher, and the terms and conditions often force people to turn up for the loan for additional terms.

  1. Unnecessary Complications

A loan is a simple process of lending and repaying with interest. Often companies come up with enticing offers like payment holidays, cash back offers, but remember that the company is not going to lose money on the deal, but the only possible loser could be you. If a personal loan isn’t simple and easy to figure out, take that signal as a red flag.


As the general consumers isn’t skilled in the act of arbitrage, loans often go in the favour of the lender and not the borrower. If you want to take a personal loan just because you can get one or do not really require a loan at that particular time, save yourself from taking the loan. Make sure you know the risks you would get involved in.


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