Finance

Loans: What Are the Risks Involved?

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Loans have a reputation for being a one-way ticket to unmanageable debt, yet still in 2017 a staggering total of £191 billion was borrowed, not including student loans. Clearly, a worrying majority of people are unaware of the potential consequences of taking out a loan, or perhaps they simply feel that they have no choice. Here, we take a look at the risks involved in taking out loans in the hope that we can make people think twice about the alternative paths they could take instead.

Payments

All lenders have to benefit in some way from taking the risk of lending money to people, and they ensure that this happens in a number of ways. Firstly, you will pay interest on any money you borrow, for example for every £100 you borrow you might have to pay back £120, this way the lender makes a profit. It is absolutely crucial that you read the small print for any loan as it will tell you what the interest rate is, and some companies charge astronomical rates which will leave you paying back far more than you borrowed.

If you fail to meet a repayment deadline, even a small monthly repayment, you will most likely be charged a penalty fine. It can be argued that these are put in place to protect lenders from those who take out loans with no plan to pay it back, but realistically in that instance the fine would also be ignored so really it is another way in which lenders profit from the vulnerability of those who are trying to keep up.

Ironically, if you become the receiver of an unexpected lump sum of money such as inheritance, which you use to pay off your debt in full, you can also be charged a fee known as an early pay off penalty. Lenders expect a certain number of repayments with interest from the people they lend to and paying off your debt in full is a way that you can avoid these, so they make it up by charging this questionable fee.

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Pressure

The pressure you feel when you have taken out a loan can be enough to cause severe psychological distress. A loan that hasn’t been paid off has the potential to cause significant damage to a lifetime’s worth of security that you have built up, for example you could lose all of your possessions and savings as well as being blacklisted for future investment opportunities. The process of having your possessions taken away from you can be heart breaking and humiliating, and the prospect of this and of a potential future of poverty can be an enormous weight on your shoulders.

Further Impact

Loans from reputable companies are fairly safe, but you need to be extra careful when borrowing from smaller, newer, or lesser known companies. This kind of company can have a more relaxed approach to your privacy and could pass on your personal information to other companies.

If you’re considering taking out a loan, you need to think very carefully about whether or not you will be able to afford the repayments and whether or not you feel able to handle the pressure of the potential consequences if you don’t. Read the small print carefully to avoid falling for any hoaxes and make sure you research alternative methods as they will usually be more beneficial to you. If you’d like more information, take a look at these 7 times when a personal loan is a bad idea for you. Sometimes, it’s a good idea to make sure that you have done plenty of research before you get a personal loan. It’s a good idea to come prepared.

The reason that you need to come prepared is that every time you take out a loan your credit score takes a hit which affects your chances of being considered for mortgages, rental properties, and any kind of hire purchase arrangement. Lenders can include all kinds of things in the small print for their loans such as hidden terms that make escaping your debt very difficult even if you do meet the payment schedule. Just make sure that you do whatever is best for you though, as it’s your life, so it’s your decision.

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Derek

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