Personal loans (personal loans) are one of the popular forms of loans in modern society. It brings many benefits to borrowers in solving short-term financial problems, but at the same time, it also has many potential risks if not managed well. To make a smart and reasonable decision to borrow from a personal loan, borrowers need to clearly understand the benefits and risks that this loan can bring.
1. BENEFITS OF PERSONAL LOANS
Personal loans can be a useful tool to solve urgent financial needs, as well as help individuals carry out major plans in life. Below are some typical benefits that personal loans can bring.
1.1. Quickly solve unexpected financial problems
One of the biggest benefits of personal loans is the ability to solve unexpected or urgent financial problems. For example, if you have a health problem, an accident, or need money to solve family problems, a personal loan can help you overcome this difficulty without having to wait long. Since personal loans often have a quick review and approval process, borrowers can receive money within a few days.
1.2. No collateral required
Unlike mortgage loans, personal loans do not require borrowers to have collateral, such as a house or car. This makes it easy for borrowers to access capital without having to worry about having to mortgage assets. Therefore, personal loans are suitable for those who do not have valuable assets to mortgage but still need to borrow capital.
1.3. Flexible use for many purposes
Personal loans can be used for many different purposes, from living expenses, paying for education and medical expenses, to small investment projects. This gives the borrower flexibility, as there is no strict monitoring or requirements on the use of the loan. The borrower can completely decide on the purpose of his spending, as long as he meets the ability to repay the debt within the committed period.
1.4. Reasonable interest rate (compared to credit cards)
Although personal loan interest rates can be quite high compared to mortgage loans, compared to credit cards, personal loans often have significantly lower interest rates. This helps borrowers save on financial costs when choosing personal loans instead of using credit cards for unexpected expenses or short-term loans.
2. RISKS OF PERSONAL LOANS
Although personal loans bring many benefits, if not used carefully, they can also cause great financial risks. Below are some risks of personal loans that borrowers need to be aware of.
2.1. High Interest Rates
One of the biggest risks of personal loans is that the interest rates can be quite high, especially for unsecured loans. These loans typically have interest rates ranging from 15% to 30% per year, depending on the bank or financial institution. If not calculated carefully, paying high interest rates will significantly increase the amount that the borrower has to pay over the course of the loan.
2.2. The possibility of default if not paid on time
When taking out a personal loan, the borrower needs to commit to repaying the loan on time. However, if for some reason the borrower is unable to repay the loan on time, the loan can become a financial burden. In addition, being late will cause the borrower to incur additional penalties and increased interest rates, resulting in the final amount to be paid exceeding the original repayment capacity. This can lead to default, negatively affecting the borrower’s credit score and creating a cycle of debt that is difficult to escape.
2.3. Impact on credit score
One of the important factors when borrowing money from a personal loan is the credit score, which is an indicator of an individual’s ability to borrow and repay. If a borrower fails to repay the loan on time or fails to pay the full amount as agreed, their credit score will decrease. This can affect their ability to borrow money in the future, making it more difficult to borrow money for other purposes and possibly leading to having to accept higher interest rates.
2.4. Hidden Fees
While personal loans can help you solve short-term financial problems, many financial institutions also impose hidden fees, such as loan origination fees, prepayment fees, late payment fees, or fees related to additional services. These fees can significantly increase the cost of borrowing, causing you to pay more than the original loan amount.
2.5. Easy to overborrow
Personal loans can be very attractive because of the flexibility in using capital and the lack of collateral required. However, this can also lead to overborrowing, especially when you do not carefully calculate your financial capacity. Borrowing a large amount of money without a clear repayment plan can cause you financial difficulties in the future.
3. TIPS FOR CHOOSING A PERSONAL LOAN
To avoid risks when taking out a personal loan, you need to keep in mind the following:
Clearly define your borrowing needs: Before taking out a loan, clearly define the purpose of the loan and the amount you need to borrow. This will help you avoid over-borrowing and make it easier to plan your repayment.
Compare interest rates and loan terms: Before deciding to take out a loan, compare the interest rates and loan terms of different financial institutions. Make sure you understand the fees and payment terms.
Make a repayment plan: Make sure you have a specific repayment plan, including the monthly payment amount and repayment period. Make sure you have enough financial capacity to repay the debt on time.
Only borrow when absolutely necessary: Consider carefully before borrowing and only borrow when absolutely necessary. If possible, accumulate enough money to avoid having to borrow.
CONCLUSION
Personal loans can be a useful financial tool to help you solve urgent financial problems, but they also pose many risks if not used carefully. Understanding the benefits and risks of personal loans, along with reasonable financial planning, will help you make the most of the benefits that personal loan bring without encountering difficult financial problems in the future.
