You’re strapped for cash, up to your eyes in debts and in desperate need of some financial aid. What do you do? Taking out a personal loan might seem like a great solution to your problems where you will get a substantial influx of cash that you can do with as you please. Even better, unsecured personal loans mean that you don’t have to put up any assets as collateral thus if you do default on payments, the only thing suffering will be your credit history. Personal loans are often seen as an easy way out due to its fast approval and straightforward application process. However, before you go rushing off to apply for one, it is imperative that you know the consequences of getting a personal loan.

High Interest Rates and Payments

High Interest Rates & Payments (Photo credit: clickittefaq.com)

Unsecured personal loans tend to be riskier than other types of loans hence lenders will charge steeper interest rates. This also depends on the amount borrowed, loan tenure and most importantly your credit rating. Take note that the longer the loan length, the more interest you will have to pay. If you can afford to do so, try to get a shorter repayment period so that you won’t be paying more interest than necessary. Be sure to read all the fine prints and ask if there are any penalties for late payments so that your ability to make payments on time are not disrupted.

Lawsuits & Penalties if Default Occurs

Lawsuits & Penalties (Photo credit: chicagoagentmagazine.com)

Since a personal loan is not secured by any valuable assets, a borrower might think that they can get away with defaulting on payments with no repercussions. In the event of this situation, a creditor has the right to sue you in court where your assets might be taken into account and liquidated to repay your debts. The situation doesn’t get better either as you not only have to pay for late penalties and the original loan, there are legal fees as well. With all these happening, in the end there might be a blip on your otherwise solid credit report that will greatly impact your future financial status.

Limited & Lesser Loan Amount

Limited & Lesser Loan Amount (Photo credit: privatemoneyblog.com)

When applying for an unsecured personal loan, there’s usually a certain limit that is set by lenders on the amount that can be borrowed. Lenders might be making a tidy profit by charging you interest on the loans but essentially it could all be in vain if the borrowers do not repay the principal amount. They might resort to other measures to get back their money but it is often a long and tiresome process which is why creditors will assess uncertainties carefully and limit any risks. That’s why it is necessary for lenders to check on your financial status, employment and credit score before approving your loan.

Mountains of Debts

Mountains of Debts (Photo credit: quora.com)

There may be many reasons that a person needs to apply for a personal loan but one of the main reasons is due to unexpected financial issues that arise which needs to be solved as soon as possible. This means that the financial problem could not be resolved by your current monetary situation which suggests a deeper underlying problem. After taking a loan, it is best to look over your budget and savings to fully understand how to restructure it to be more beneficial to you. After all, if there happens to be another unfortunate financial problem, you might not be able to handle it as you are already in the midst of paying off your first loan.

Credit Rating Affects Everything

Credit Rating (Photo credit: canada.creditcards.com)

As mentioned previously, your credit score is really important to the creditors who will be approving the loan to you. Your interest rates and variable loan amount depends on this as well. There are lenders who will give out loans to debtors who have a poor credit rating but the terms will not be beneficial to them. Instead, the borrowers will receive a loan with a much lower principal and steeper interest rates in order for creditors to protect their own risks. Often, stricter terms are given so that they can secure their loans.

When all’s said and done, a personal loan can go either way, depending on your budget and repayment terms. You must ensure that you are disciplined enough to follow through on the loan schedule and make the repayment on times. Otherwise, the late fees and penalties will cause the loan to be even more of a burden to your financial situation. It is crucial that you take into consideration whether a personal loan will benefit you more in the long run or perhaps it will be better to look for other financial aid elsewhere.

If you are in tight spot and are in need of a cash boost, obtaining extra financing by applying for personal loan is the best option. Personal loans are great options when you only need the loan for a relatively short amount of time and for smaller loan amounts. On the flip side, personal loans often have higher interest rates compared to other long-term loans such as mortgages. The loan’s terms are determined by the financial standing of the borrower as well.

Get a Personal Loan (Photo credit: news.com.au)

Unlike other varieties of loans, personal loans are approved in as little as a day and once it is approved, the cash is yours to do as you please. Basically, financial institutions in Malaysia offers two types of personal loans to customers. These two types are known as secured and unsecured loans, where the most common would be unsecured loans. Revolving loans, overdraft facility and instalment loans are typical unsecured loans and the standard type of loans given out by banks. Educating yourself on the types of loans available will help you to choose which type is most suited to your needs.

Secured Personal Loan

Secured Personal Loan (Photo credit: ideapractices.org)

Secured personal loans poses less risk to the creditor as debtors will offer various valuable assets as collaterals for the amount that they wish to loan. Creditors will offer a much lower interest rate compared to an unsecured loan as they have a form of security in their hands. Borrowers beware, if they fail to meet their repayment schedule, creditors have the right to repossess the assets that were put up as collateral. Make sure that you do have the financial capability to pay the amount accordingly otherwise you will lose your assets.

Unsecured Personal Loan

Unsecured Personal Loans (Photo credit: qykapp.com)

An unsecured loan differs from a secured loan in which borrowers do not need to provide any assets as collateral before applying for a loan. As this acts as a larger risk to creditors, debtors must prove to them that they are able to repay the loan in due time. Unsecured loans tend to have a higher interest rate as well. As no assets are offered, borrowers must be able to convince them that they have a good credit history and solid financial strength. Lenders are often taking a higher risk in giving out an unsecured loan thus the interest rates and other terms of the loan tend to be less beneficial to the debtor. Even though no assets are given as collateral, lenders can still take legal action against the debtor to recover their losses if the occasion arises that they are shirking on the repayments.

a)      Personal Instalment Loan

Personal Instalment Loans (Photo credit: qykapp.com)

The most frequent type of personal unsecured loan is commonly known as instalment loans. A borrower is required to pay back a predetermined amount on a regular basis over a certain duration of time which is known as the loan tenure. There are several different factors that influence the repayment amounts that a debtor has to make. They are calculated based on the amount of the loan, the interest rate and the length of your loan tenure. After the final payment is made, the conditions of the loan are deemed to be completed and the loan is repaid in full. If there is a need for more cash, a new instalment loan will have to be applied.

b)      Revolving Loans

Revolving Loans (Photo credit: superloans.pw)

Revolving loans are typically a line of credit given to you by the bank where there is a fixed amount given but instead of instalment loans where the full amount is given, you can use any amount as and when it is needed, up to the limit given. The interest rate is only charged based on the amount taken or used, and not the full amount. Once the balance is repaid, your loan’s limit will reflect the original approved amount. If all these sounds familiar, that’s because this type of loans are how credit cards work. Banks offer you a fixed credit limit which can be used whenever you need it and the balance is paid every month. Revolving loans are flexible and you do not have to keep applying for one.

c)       Overdraft Loans

Overdraft Loans (Photo credit: investmentyogi.com)

Lastly, another type of unsecured loan is overdraft loans which is unlike instalment and revolving loans where it isn’t subject to the same rules and regulations. Essentially, this type of loan is an extension of your account. The function of this loan is to allow you to withdraw money even though the credit limit has been reached. This means that there will be negative amount in your bank account should you choose to do so. Keep in mind that the interest rates for overdrafts are inclined to be more expensive than other types of loans.

Before reaching a decision to take out a loan, go over the pros and cons and ensure that you are mentally and financially able to make regular payments.