So, what the difference between a secured and unsecured loan?
Put simply, the latter checks for your creditworthiness while the latter also ensures the safety of repayment by means of collateral in the form of property.
Of course, an unsecured personal loan is the simplest of all financial products but it still manages to obtain interest from its customers. Hopefully, not too much money.
For that, one has to be aware of the financial traps that await us when we take an unsecured personal loan.
10 Traps to Avoid When Taking a Personal Unsecured Loan
Some of these traps are so obvious yet we tend to ignore them. Having said that, here are 10 traps to avoid when taking a personal unsecured loan:
1: Large loans for a longer duration
With unsecured loans, the bank will always try and sell you a larger loan than you first considered. Second, they will want you to take for a longer period of time as well. It is because they want to earn more interest over a longer period of time. So, keep the loan short and small.
2: Opt for a fixed variable loan
While most personal unsecured loans are fixed, there are a few that are of the variable type. Ensure you pick one that has a fixed interest rate.
3: Look at the TAR, Not the APR
Money lenders can play around with the APR and which is not what you should be looking at. Instead look at the total amount repayable each year. Simply put, it is the total cost that includes charges and interest of all your payments. Also, ensure that you can make the monthly payment too.
4: Don’t settle for any Terms & Conditions
You can always find better terms and conditions. In one way, if you want to close the loan early, you can make a lump sum payment but not be charged for it. No matter what, understand the fine print before you take the loan.
5: Origination fees
Apart from the total cost, there are other fees that the bank charges such as an origination fee. As you compare loans, compare the origination fees charged by each bank and then pick one based on which is least.
7: Think about alternatives
Instead of lodging in for an unsecured person, a better way is to save the money yourself or even use a credit card that offers lower rates. Better still, if you have a good credit score, then going to peer-to-peer lending sites is advisable such as Zopa.com in the UK and LendingClub.com in the US.
8: Check for add-on terms
Just in case, you miss or default on the loan, there are terms that must be checked for such late payment penalties, collection fees or even payment protection insurance too. Understand these add-ons before you take a loan.
9: Don’t trust any bank
No matter what, your bank will always sell expensive loans to its own customers. They don’t necessarily have your best interests at heart. So, shop around on sites like Bankrate.com or check with other financial institutions if they have a better deal for you. That works almost always.
10: Gimmicks should be avoided
While these products are meant to be the simplest, sometimes they’re offered with gimmicks such as payment holidays and even cash back. Be warned that you will lose the cash back if you pay the loan off sooner while the payment holidays option will increase the interest rate that, in turn, will increase your repayments too. It will prove to be far more expensive than it is worth.