Guest post, Guest contributions do not necessarily reflect the opinion of the editors.
09.06.2021
A bank loan can offer numerous benefits, but it poses a risk for both you and the lender. The lender runs the risk of lending you the money but not getting it back in full. As for your personal financial health, in the worst case scenario, you could lose money or even your home. Because of this, lenders use careful standards of verification to minimize risk for both parties. The credit terms vary depending on the provider. You can find out how to find cheap loans in the Loans Guide from Decided read up. In this article, however, we would like to deal in detail with the risks of bank loans.
Additional financial burden
A bank loan means additional debt. Depending on the amount of the loan, this can be several thousand euros per month. Even if you carefully examine your financial plan, it can still be a burden.
Not only that, there is always the chance that your financial situation could suddenly and drastically change due to illness or job loss. An installment that was manageable in one month can no longer be paid in the next month. You should therefore make sure that new loan installments do not bring you to the edge of your financial limits.
Lower credit score
If you get into a situation where your payments are late, it will have a negative impact on your creditworthiness. If you are a few days late here or there, it doesn’t matter. However, as soon as a payment is more than 30 days in arrears, the bank reports the arrears to the Schufa authorities.
Multiple missed payments of 30, 60, or 90 days add up – and ruin your creditworthiness. Once your creditworthiness goes down, it can take years to get back. This will affect your ability to receive funding for the foreseeable future.
Loss of personal property
If you hedge your loan with an asset, you run the risk of losing that asset if the loan fails. As soon as you are 90 days in arrears, the bank will usually send you a letter of formal notice requesting immediate repayment of the loan.
If you are unable to repay, the bank will initiate foreclosure proceedings. This is a legal process whereby the bank takes ownership of the asset, usually real estate. Then the asset is foreclosed and the money used to make up for the loss incurred. As a result, in the worst case scenario, you could lose your home, car, bank account or other collateral that you pledged to secure the loan.
Risks for the bank
The borrower side is not the only risk with a bank loan. The bank is also taking a risk by lending you the money. Because of the significant cost of collecting loan losses, banks rarely get back the full amount of loan that was granted to a defaulting borrower. Too many of these defaulted loans reduce a bank’s bottom line and can ultimately damage its business.
Conclusion on the risks of bank credit
You can see that there are significant risks involved in taking out a personal loan. You should weigh these carefully. Just because you qualify for a personal loan doesn’t mean you should take it. Some personal loans have interest rates well below 10%, while others can be three or four times as high. The interest rates on these loans depend on your creditworthiness.
Also, be careful when comparing the APR. The effective annual interest rate can be distorted. Instead, pay attention to the total amount you will pay over the life of the loan, including interest, fees, and principal. That is a better measure of the real cost of the loan.
Photo credit
1. House, property, value, increase in value, credit, pay, loan, increase, house purchase, sale, http://www.shutterstock.com/de/pic-181820717/stock-photo-holding-house-representing-home- ownership-and-the-real-estate-business.html >> Open on photaq.com
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Guest contribution, guest contributions do not necessarily reflect the opinion of the editors.
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