The 3 biggest risks of taking out a personal loan

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Personal loans can be a good way to borrow money when you need it. After all, these loans have set payment schedules, so there are no surprises – and the interest rates you will pay are often much lower than what you would be charged if you used a credit card.

But while there are benefits to using a personal loan to access the funds you need, there are also some major risks you might face when taking out this type of loan. Here are three big ones that you should be aware of.

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1. Not being able to make your payment

The biggest risk in taking out a personal loan is not being able to afford to keep your commitment to your lender. If your monthly loan payment is too high for you and you don’t pay off your loan, you could end up with serious financial consequences.

In addition to damage to your credit score, you could also face legal action. This could lead to a court judgment against you which could be enforced by garnishing your wages or a lien on any property you own.

To make sure this doesn’t happen, figure out exactly how much your personal loan payments are and see how they fit into your budget. If you find that you can’t easily afford the payments, don’t borrow.

Many people also default on their loans due to job loss or a medical problem. To guard against this risk, aim to build an emergency fund with several months of living expenses before borrowing. That way, if you lose your job or can’t work because you get sick, you will still have money to pay off your loan.

2. Debt too deeply

If you take out a personal loan and agree to make monthly payments, that debt could interfere with your ability to meet other goals you may have. This is because your income will now have to be used to pay off your loan instead of doing other things with your money, like saving for retirement.

You want to avoid locking in your future income by taking on a lot of debt or going into unnecessary debt. So, before you take out a loan, ask yourself if you really need to borrow and if incurring this debt is worth the sacrifice that your future yourself will have to make while you pay it back.

The risk of getting too deeply into debt is even greater if you take out a personal loan to consolidate your debt and use the loan proceeds to pay off your credit cards. If you pay off your cards and free up your credit limit, you could end up billing the cards again if you spend beyond your means. This could leave you with both the personal loan payment to be made and a bunch of new credit card debt you need to pay off.

To avoid this, make absolutely sure that you are able to live on a budget and not overspend before consolidating your credit card debt using a personal loan.

3. Impede your ability to borrow in the future

Lenders won’t give you a loan if they think your debt is too high for your income. If you take out a personal loan, the payment of it will be taken into account when determining your debt ratio.

This could become a big problem if you are borrowing now and have to take out a loan for something else later before your current loan is paid off. Suppose you take out a loan for your marriage. If that loan is too large for your income, your debt-to-income ratio might be too high for you to qualify for a home loan with your new spouse next year.

To avoid this risk, don’t borrow for anything unless you absolutely need to. And if you do borrow, always keep your loan balance as low as possible, and try to make sure that the total amount of debt you owe – including loans and credit card payments – is kept reasonable for your money. returned.

Minimizing These Risks With Personal Loans Is Worth It

Whenever you are considering borrowing money, you should be aware of the risks involved. By understanding these three big potential risks of taking out a personal loan, you can hopefully take steps to minimize them so that your decision to borrow doesn’t negatively impact your future.

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