What Are The Possible Risks In Getting A Personal Loan?

Know the 7 risks of taking out a personal loan. High interest rates, fees, penalties, and other hazards to consider before applying.

8 Jul,2023 11:33 IST 2906 Views
What Are The Possible Risks In Getting A Personal Loan?

It is not uncommon nowadays for anyone to find themselves in the middle of a sudden financial crunch. If you are just starting a career, you may have expenses of relocating and setting up a home, refurbishing your wardrobe, or buying a bike or car for transportation. If you have pinpointed a dream home, you will find that the home loan only covers eighty to ninety per cent of the value – the rest you need to cover through other sources. Or perhaps there is a sudden business expense, medical expense or a child’s overseas tuition fee.

At this point of time, the personal loan seems an extremely attractive proposition. There are numerous platforms, banks and NBFCs that offer instant personal loans and online loans . All you need to do is apply with a click of a mouse, fill in a few details and the loan is yours – no questions asked, no collateral demanded!

Easy and hassle-free though it may be, personal loans come with their own share of risks and hazards. In this article, we explore the not-so bright side of personal loans.

1. High Interest Rates:

Being an unsecured loan, the interest rate is higher than that of secured loans. Interest rates depend on a number of factors – your credit score, whether you are salaried, self-employed or unemployed, your income slab, the reputation of your employer, the kind of employment contract you may hold and the number of years remaining in service. Each of these details is factored in the risk assessment of the lender. The higher the level of risk assessed, the higher the interest rate that you will be offered. Interest rates can go up to almost 50% p.a.!

2. Fees:

Most banks and NBFCs will charge you a loan processing fee for the personal instant loan. This is usually from 0.5% to 2.5% of the loan amount, varying from lender to lender. Thus, for a personal instant loan amount of ₹ 10,00,000/-, the processing fee would be ₹5000/- if calculated at the rate of 0.5% of the loan amount. In addition, other fees such as verification fees and duplicate statement charges often add to the cost of the personal loan.

3. Penalties:

In the unfortunate circumstance where you miss paying the EMI on your loan on time, the lender will levy a late payment charge. This is usually between two to four per cent of the EMI amount, payable for each month of delay.
Perhaps the most unappealing aspect of a personal loan is that some banks and NBFCs levy a penalty when you choose to pay your loan earlier than scheduled.

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4. Insurance Charges:

There are some banks and NBFCs that may pressurise you to insure your loan against any unforeseen calamity which could interfere with your ability to repay the loan. If this is important to you, you may benefit from calling your own agent and comparing the deal she/he can offer with that of the lender’s proposed insurer.

5. Privacy Concerns:

Data breaches are quite common today. While banks are governed by strict privacy laws, other platforms may not be. While it is hoped that lending platforms will be diligent about data confidentiality, one should choose a lender who has a reputation of trust before applying for a loan online.

6. Short-Term Pay-Day Loans:

These are a type of personal loan provided with the agreement that the loan amount along with the interest will be paid on the borrower’s upcoming pay-day. These usually have a high rate of interest. If not planned carefully, the borrower can end up continuously rolling over the loan or part of it – thus having to fork out huge sums as interest payments over the next couple of months.

7. Cash-Back and Other Offers:

Sometimes lenders will try to gain an edge over other lenders through offering cash back, payment holidays and other seemingly exciting deals. Do keep in mind that the lender is running a business. You will be made to pay the cost of anything offered, even if at a later date.


To conclude, personal loans are extremely handy when suddenly squeezed for resources, especially since there are a number of platforms offering instant online personal loans. However, the interest rate offered is usually quite high compared to the repo rates. The financially prudent will prefer to take a loan only in the case of an emergency and not for regular consumption expenditure, which is neither essential, nor urgent. If you find yourself having to take a personal loan, do compare the offerings of various lenders. Read the fine print – the terms and conditions. Having done this, you will be able to pin-point the best option for yourself. In addition, this knowledge will come in handy while negotiating the terms of your loan with the lender.

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Disclaimer: The information contained in this post is for general information purposes only. IIFL Finance Limited (including its associates and affiliates) ("the Company") assumes no liability or responsibility for any errors or omissions in the contents of this post and under no circumstances shall the Company be liable for any damage, loss, injury or disappointment etc. suffered by any reader. All information in this post is provided "as is", with no guarantee of completeness, accuracy, timeliness or of the results etc. obtained from the use of this information, and without warranty of any kind, express or implied, including, but not limited to warranties of performance, merchantability and fitness for a particular purpose. Given the changing nature of laws, rules and regulations, there may be delays, omissions or inaccuracies in the information contained in this post. The information on this post is provided with the understanding that the Company is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. This post may contain views and opinions which are those of the authors and do not necessarily reflect the official policy or position of any other agency or organization. This post may also contain links to external websites that are not provided or maintained by or in any way affiliated with the Company and the Company does not guarantee the accuracy, relevance, timeliness, or completeness of any information on these external websites. Any/ all (Gold/ Personal/ Business) loan product specifications and information that maybe stated in this post are subject to change from time to time, readers are advised to reach out to the Company for current specifications of the said (Gold/ Personal/ Business) loan.

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