How To Know the Risks of a Personal Loan

When faced with extreme financial crisis or necessity, you will naturally exhaust all remedies to help you through the rough tide. Whether you are indebted deeply or insolvent and needing a loan restructuring or loan consolidation for your homeowner loan, fast cash is a must to salvage whatever is left of your financial circumstances.

If you have assets that you can stake out to secure another loan to finance your existing monetary liabilities, securing a loan is easy. After all, lenders will have an interest in your property, which they can foreclose upon or take possession of later on if you fail to pay according to schedule. However, if you are facing a blank wall for not owning anything that you can put as a guarantee for credit, your last resort is to apply for a personal loan.

A personal or unsecured loan is also known as a signature loan. There is no collateral involved, and lenders will only rely on your previous credit records as assurance. If you left a bad credit loan record in the past, lenders may not immediately approve your loan application unless you can recommend a co-borrower who can guarantee subsidiary payment in case you are not able to settle the loan.

Personal loans are also known to be high risk loans. Actually, the burden of the risk is on the part of the lender, because he is loaning money to you without any of your properties that he can attach to the loan. This is the reason why many financing institutions are wary of approving personal loans for people with a bad credit rating.

Since secured or collateral loans are less risky for lending establishments, the terms accompanying these loans are easier and much cheaper to the borrower. The risk here, however, is more on the borrower because he is facing the threat of losing his property if he cannot meet the payment terms set by the lender.

On the other hand, personal loans are more burdensome on the borrower when it comes to terms and period of payments. While secured loans are often available for long-term payments at low interest rates, personal loans are usually set for shorter periods of payment and at high interest rates. The reason for this is that the lender wants to ensure that he can retrieve his money in the shortest time possible to reduce the risk of losing his money from delinquent borrowers.

Personal loans come in three types:

  1. Personal unsecured loan. This is a loan with no property involved as collateral and where the borrower has to personally and individually pay all by himself.
  2. Unsecured business loan. This is a loan where the business serves as guarantee for payment.
  3. Unsecured business loan with a personal guarantee. This is a loan where a business entity is the borrower, but an individual will pay the liabilities if the business is not able to sustain the payments.

Personal loans can also be found online, but caution should be observed to avoid fraud from scheming individuals. Otherwise, if you are not careful, the supposed last resort for your cash redemption might turn out to be another financial entanglement. 


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