NEW YORK, NY / ACCESSWIRE / January 2, 2025 / Personal loans are a helpful tool if used properly, but there are some risks depending on how you manage your loan. It's important to be aware of these things before beginning the loan application process. This is particularly true for those who are planning on using a personal loan for debt consolidation. This article breaks down some of the risks associated with using personal loans, helping you know what to expect.
1. High interest rates could increase the cost of the loan
The risk associated with taking out a loan when there's a high interest rate is that personal loan rates are typically fixed for the life of the loan. This means the interest rate won't go down even if the bank lowers its rates before paying off your loan. It is possible to refinance a personal loan with some lenders, but this essentially means that you'd be starting over and extending the life of the loan, which could cause you to pay more in interest over time.
To find a loan with a lower interest rate, it's a good idea to take steps to get yourself in a solid position to borrow. This could include paying bills in full and on time and working on lowering your debt-to-income ratio. It's also important to shop around for the best loan terms before applying for a loan.
2. Borrowers could face early repayment and loan origination fees
Some lenders charge a prepayment penalty fee when a borrower pays off their loan early. This would add to the overall cost of the loan. Carefully read the terms and conditions of the loan agreement to check for this.
Another fee to watch out for is an origination fee. Many lenders charge an origination fee for processing your loan application. This fee will show up in the final loan agreement and add to the total cost of the loan. Be sure to look for an itemized list of fees in the loan contract to understand what is included with your loan.
3. Debt consolidation could increase overall debt
Taking out a personal loan to consolidate your debt consolidation can be helpful, but only if the loan is managed correctly. Many borrowers pay off their debt and then start spending again when the new credit card bandwidth becomes available. However, this will increase your overall debt, not solve your debt problems.
The cascade effect of mismanaging a personal loan is that it could cause you to miss payments when the debt load becomes overwhelming. "Payment history" and "amounts owed" are two key variables that go into calculating your FICO credit score, and missing payments could negatively impact your score.
If you decide to consolidate your debt, it's important to get down to the root of the issue first to ensure you don't end up in the same place in the future.
The Bottom Line
Taking out a personal loan could be a good option as long as you understand how to maintain the loan responsibly. If you mismanage the loan, you could end up incurring more debt, which could negatively impact your credit score.
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SOURCE: OneMain Financial
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