Personal or payday loans can be beneficial when you need extra help to manage your monthly expenses, unexpected bills, or make a big purchase. But, like any financial decision, taking out a loan requires some consideration.
It's important to remember that when you take out a loan, you're committing to paying it back with interest. While using a personal loan to consolidate debt or finance a major purchase can be smart, ensuring you're not taking on more debt than you can handle is crucial.
Borrowing money is never entirely risk-free. However, by understanding the most common risks associated with personal loans and minimizing them, you can make informed decisions to improve your financial situation in the long run.
Top 5 Risks Faced When You Borrow Money Via a Personal Loan
Getting a loan can be a great way to obtain the funds you need to cover expenses or make a large purchase. Let's go through the top 5 risks associated with borrowing money. By being aware of these risks, you can make informed decisions and minimize their potential downsides.
1. You'll Be Taking on More Debt
One of the most significant personal loan risks is that you'll be taking on more debt.
If you have existing credit card debt and other financial obligations, consolidating debt with a lower interest rate personal loan could be a good idea. Still, it would be best not to overstretch yourself with unnecessary debt.
2. Higher Interest Rates Than Necessary Might be Charged
Your credit score will be linked to what level of interest rate you'll pay on your loan. Higher interest rates are usually offered to borrowers with bad credit, but if you have a good credit score, you'll generally be able to access a lower interest rate.
3. You May Suffer Credit Score Damage
When you apply for a personal loan, a hard credit inquiry will be carried out, this may not pose a problem if you have an excellent credit history but could be a risk if you already have bad credit, as you may need to rebuild your credit score afterward.
4. There Could be Prepayment Penalties
If you pay off your loan early, a prepayment penalty may apply. Prepayment penalties are essentially the opposite of fees for late payments – your bank charges you money to make up for the interest they've lost when you repay early. Check whether your lender will hit you with these fees, which can impact the total money owed.
5. Origination Fees May Apply
You'll always pay interest and typical processing charges with personal loans, but a loan origination fee may also apply. Origination fees charge a percentage of the loan amount you're borrowing, ranging from up to 15%. This can either be deducted automatically from the loan amount you are granted or added to your overall loan balance – make sure you are 100% clear on how your bank will charge you these fees.
How to Minimize the Risks Personal Loans Pose
While the risks of taking out a personal loan are genuine and often unavoidable, there are various things you can do to minimize the potential risks you face. Remember to always:
1. Keep Affordability in Mind When Borrowing Money
Borrowing costs need to be adequately considered before taking out a personal loan. You need to factor in some wriggle room for potential origination fees and other charges on top of your loan's typical monthly payment costs. This will help you avoid overstretching your debt-to-income ratio – i.e., the debt you hold about your regular income.
2. Shop Around for the Best Personal Loan Interest Rates
It's essential to avoid high-interest debt and loans with unfavorable terms. Shop around to find bank loans and other loan providers that offer competitive interest rates, fast access to loan proceeds, and loan term options that meet your requirements.
3. Consider Automating Your Monthly Payments
Automating monthly payments with your bank account is one way to ensure you consistently make on-time payments. You should also ensure this account maintains a high enough balance to cover your monthly payments as and when they are due, as failures to pay on time could adversely affect your credit score.
Top Personal Loans with the Best Interest Rates for 2023
Here are some of the best personal loan lenders and products to consider for secured loans and unsecured loans right now:
|Interest Rate p.a. / Effective Interest Rate (EIR)
|Loan Tenure Available||Loan Approval Time||Processing Fee Costs||Top Personal Loan Perks|
|UOB Personal Loan
|3.4% p.a. / 6.36% EIR||1-5 years||May vary||1% (waiver available)||Processing fee waiver for 26-60 months
1.5-2.5% rebates available
|Standard Chartered CashOne Personal Loan
|3.48% p.a. / 6.95% EIR||1-5 years||Cash disbursement in 15 minutes||May vary||Fast loan approvals
Interest cashback available
|CitiBank Quick Cash New Customer Personal Loan
|Check with provider||1-5 years||60 seconds for converting credit limit to cash||May vary||Convert your unused credit limit to cash in 60 seconds
No documents are required, and no hidden fees.
|HSBC Personal Loan
|4.0% p.a. / 7.5% EIR||1-7 years||Check with provider||N/A||Promotional interest rates and cashback are available
Flexible monthly payment periods
|DBS Personal Loan
|3.88% p.a. fixed / 7.56% EIR||1-5 years||Online applicants get instant disbursement of funds||May vary||Borrow up to 10x your monthly salary
Instant disbursement when you apply online
Suppose you're concerned about a bad credit rating affecting your loan application or worried that bank loan approval times are too slow. In that case, you might consider taking out a personal loan with a licensed money lender instead. A typical moneylender loan applicant will have their personal loan approved within 30 minutes, and we offer clear and simple terms and no hidden fees, too.
Conclusion – Be Aware of the Risks When You Borrow Money via a Personal Loan
Loans offer many benefits, from helping you to consolidate credit card debt or handle unexpected expenses to giving you the extra cash you need to make a significant purchase. But every personal loan comes with its risks, and it's important to remember that:
- Getting a personal loan means taking on more debt. It would be best to avoid high-interest debt and make on-time payments.
- Higher interest rates may be offered to borrowers with a bad credit history, meaning that boosting your credit score before borrowing could help you to secure a lower interest rate.
- Affordability is everything. Never overstretch your monthly payment burden; always shop around to find competitive personal loan interest rates.
At Raffles Credit, we understand that sometimes you need fast access to funds. That's why weThat's a range of loan products, including payday and personal loans, designed to be easily accessible online. With our streamlined application process, you can get your application approved within an hour. Don't let finDon'tl stress hold you back, contact Raffles Credit to get your cash today!