Traps to Steer Clear of When Shopping for Personal Loans


Most people automatically reach for their credit cards every time they need to borrow some money, however, personal loans can not only be simpler but also cheaper and have no impact on your credit score. Though personal loans have very strong advantages, they are not without their own set of concerns, which need to be avoided, if you desire to keep costs and stress to a minimum.

Advantage of Personal Loans

The biggest advantage of a personal loan is that it has a fixed tenor. Typically, it is less than five years as compared to the 30 years or more needed to settle credit card dues by paying the minimum amount per month. Another big plus of a personal loan is that the rate of interest applicable is fixed. In sharp comparison, the interest charged by a credit card issuer increases if the balance is more than 60 days due. Also, the issuer is free to increase the applicable interest rate without notice at its own discretion. One of the reasons why credit cards charge such a steep rate of interest is because it wants to profit by the lack of planning of its customers. On the other hand, personal loans are invariably taken after a lot of planning by customers who know that they need to tackle an emerging financial situation, and thus there is more time to find the best deal.

Hazards Lurking In Personal Loans

You would be mistaken if you think that personal unsecured loans are not without their own share of complications and dangers that may often be buried deep in the fine print and come to light at the time of taking the loan or even settling them. It is vital that you recognize them and understand their ramifications so that you can take a more informed decision. Some typical examples:

Insurance tagged on to the personal loan: Invariably, personal loan salesmen will suggest to you to buy insurance cover so that your family is protected from the unexpected and don’t have to deal with loan repayment. Two types of insurance are typically suggested; life insurance and unemployment insurance. The premiums for life insurance tend to be astronomical when offered by the loan companies and does not make for a good buy. It may be worthwhile to buy unemployment insurance because it is difficult to buy such products separately that would take care of the loan repayments even if you lose your job. However, if your job front is stable and no risk is envisaged, then it may be better to use the money saved on the premium to pay back the loan faster. If you think it makes sense to buy a policy then you should examine the cost, claim requirements, the extent, and duration of payment before putting your money down.

Pre-compute interest: This is a very complex way of interest calculation that adds on the entire interest on the loan to the principal and divides the aggregate by the period of the loan. What this ensures that in case you pay off the loan earlier than the scheduled end, you will have ended up paying a lot more interest that what would have been actually applicable. Ask the lender the basis of the interest calculation and avoid loans that have the interest pre-computed. However, if you pay back the loan using the full term there is no difference that the pre-computing makes to the interest amount.

Origination fee: Most lenders will charge an origination fee for extending a personal loan but this is often ignored by customers who only go by the quoted rate of interest. However, adding the origination fee along with the interest can change the entire complexion of the loan. Hence, the only way loans should be evaluated is by calculating the APR, which necessarily includes the origination fee. As long as the APR of a personal loan is below that of alternative sources like credit cards, it makes sense to take on the personal loan. The other thing to keep in mind is that the origination fee is deducted from the loan extended so you will need to increase the loan amount to allow you to get the loan of the amount that you actually require, else you will fall short. Also, it needs to be appreciated that the origination fee is not refundable even if you pay back your loan before the scheduled date.


While personal loans represent a very attractive way of bridging a gap between income and expense, you need to be careful regarding the various terms and conditions that are tagged on by the lenders as also the way the interest is computed. Everything else being satisfactory, the real test of a personal loan is its APR and you should aim to get the lowest one possible on your loan.