A personal loan could help you out of a financial jam, as it could fund an essential home repair or fix a broken-down car. However, you’ll need to select a loan option that provides a low-interest rate and the right repayment schedule for your needs.
It’s also vital to understand the repercussions of falling behind on repayments, which could prevent a big financial mistake. To make an informed choice, here are three risks to consider before applying for a personal loan.
1. An Inability to Make Repayments
While you might currently be able to afford the repayments on a loan, there might come a day when you are unable to do so. For example, you could lose your job or build up too much debt. If a repayment amount is too high, you could default on a loan, face legal action, and damage your credit score.
A court judgment could lead to the amount being removed from your salary each month or your home could be repossessed. What’s more, significant debt could prevent you from keeping up with many bills, such as your mortgage. Consequently, you might face home foreclosure, which could result in you losing a property for good. It is, however, possible to stop foreclosure, but you must do so before a sale is complete.
Before you apply for a personal loan, ensure you can afford the repayments alongside your existing bills. Also, you must factor in variable mortgage rates to ensure you can financially cope with an increase.
2. Future Credit Problems
Your dream of securing a mortgage could be over if you build up much debt and a poor credit history. Even if you make monthly repayments on schedule, a mortgage provider will factor in the cost of a loan to determine your debt-to-income ratio. So, if you’re planning to become a homeowner soon, you’d be wise to avoid taking out a personal loan to increase your likelihood of mortgage approval.
If you already have a personal loan, make overpayments to reduce debt as soon as possible and cut the interest rate. Always read the fine print before making early payments, as some companies might feature early payoff penalties.
3. A Reduced Quality of Life
If you receive a personal loan with a high-interest rate, you could spend much of your income repaying the debt. As a result, you might fail to build an emergency fund, a property down payment, or retirement savings. It’s for this reason why you should avoid applying for a personal loan unless you have no other option and only apply for the exact sum you need. It will prevent you from spending many years repaying a loan, which can provide a better quality of life.
A personal loan can be a financial lifeline when your car breaks down or you need to undertake an emergency home repair. Yet, it is crucial to weigh up the pros and cons of a loan. Also, thoroughly research the different options available to avoid a decision you might come to regret.