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Understanding The Personal Loans Hidden Costs

A personal loans is usually a small loan that a lender gives to a client with no collateral. They are also known as unsecured loans since the lender cannot repossess any of your property if you fail to repay the loan. There are many benefits that come with a personal loan including fixed interest rates, being able to borrow more compared to a credit card, ability to choose the repayment period, and ability to consolidate several debts into one personal loan. With all these options, it is possible to apply for a personal loan without giving it a second thought. And this can expose you to personal loans that seem attractive but include huge hidden costs.

Early redemption charges

When you get a personal loan you will agree with the lender the period you will take to repay the whole amount. A lender will make the profit based on the period you will be paying the loan. Whenever you pay a loan before the set date, the lender stands lose some of this profitability. Mainly a personal loan will range between 1 – 5 years. A lender may argue that he needs to be compensated if the loan is repaid earlier. Another argument is that the charges will are included to discourage the customer from repaying the loan too early.

Insurance

A lender may include an insurance charge which it will pay to an insurance company for compensation if you fail to pay due to unemployment or death.

Life insurance: this is typically charged by the lender to cover for the losses if a customer losses their life. Since a personal loan is unsecured the lender may want to argue that they require insurance in case you are not there.

Unemployment insurance: it can be a bit convincing since it might be difficult to buy another policy that can repay loan in case you lose your job. It can be beneficial; however, you should try and do the math to see how much you will be charged per month.

Pre-compute interest

This is how the lender calculates the interest rates you should pay every year. In some situations the personal loan may be calculated in such a way that you pay more of the interest of your loan earlier than monthly or even a year. It simply means that when your loan is paid early then you may end up paying more interest that the rate the lender had quoted. This can particularly be confusing when the lender assures you there won’t be any early redemption charges.

Origination fee

This is normally applied by all lenders, and it may be hard avoiding it. When applying for a personal loan you will get a certain percentage deducted from your loan amount as the origination fee. Even if you decide to pay off your loan a day later, you may not get a refund of the origination fee. The annual percentage rate of a personal loan will appear lower compared to credit card’s interest rate, but make sure you understand the origination fee and Annual Percentage Rate.