Understand the Risks Tied to Personal Loan Before You Borrow

In 2025, personal loans remain one of the most accessible financial tools in India, with over Rs.7.5 lakh crore disbursed in personal loan segment last year alone. Whether it is for a wedding, emergency medical expenses or home renovation, personal loans offer quick, easy and collateral-free access to funds. But while they are convenient to avail, they are not risk-free. There are personal loan pros and cons which should be known before going for it.

Before signing the loan agreement, it is very crucial to understand the potential risks that could become a financial burden at later stage.

What Is a Personal Loan?

A personal loan is an unsecured loan which means you don't need to pledge assets like property or gold. It is disbursed as a lump sum and repaid through fixed monthly EMIs over a tenure ranging from 1 to 5 years. You can use it for almost any purpose say travel, education, debt consolidation or emergencies.

Why You Should Be Cautious?

Despite their flexibility, personal loans come with risks that can impact your financial health. There are some important things to know before taking a loan. Mentioned below are the most Personal loan risks involved in it which you should not overlook.

1. High Interest Rates

Interest rates on personal loans can range from 10% to 36% per annum which will be depending on your credit score and lender. That is on a very higher side as compared to secured loans like home or car loans.

Example: If you borrow Rs.5 lakh at 18% for 5 years, you will pay over Rs.2.75 lakh in interest alone.

Remember to always compare rates across banks and NBFCs before applying.

2. Hidden Charges & Fees

Many borrowers do not pay attention towards processing fees, prepayment penalties, and late payment charges. These can add thousands to your loan cost.

• Processing Fee: 1–3% of loan amount
• Prepayment Penalty: 2–5% if you repay early
• Late Payment Fee: Rs.500–Rs.1,000 per missed EMI

Example: A Rs.10 lakh loan with a 2% processing fee means Rs.20,000 will be deducted upfront.

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3. Impact on Credit Score

Missing even one EMI can hurt your CIBIL or Experian credit score which will make future borrowing harder and more expensive.

Scenario: A missed payment can drop your score by 50–100 points and will affect your eligibility for home loans or credit cards in future.

You should set up auto-debit for EMIs and maintain a buffer in your account.

4. Debt Trap Risk

Borrowing more than you can repay leads to a cycle of debt. Many people take new loans to repay old ones which their financial situation.

Example: Ramesh took a Rs.3 lakh personal loan for wedding expenses. Unable to manage EMIs, he borrowed again to cover payments and now he is owing Rs.6 lakh with no savings left.

Use an EMI calculator to check affordability before borrowing.

5. Misuse of Loan Funds

Personal loans are flexible but remember, it is also a liability. Using borrowed money for non-essential expenses like luxury gadgets or vacations can lead to regret.

Use loans for asset-building (education, business) or emergencies and not for unnecessary spending.

6. Regulatory Risks

In 2025, RBI has tightened norms for unsecured lending such as Personal Loans:

• APR Disclosure: Lenders must show total cost upfront.
• Digital Lending Rules: Only RBI-registered platforms can offer loans.
• No Pre-approved Personal Loan Offers Without Consent
• Why it matters: Borrow only from trusted and RBI-compliant lenders to avoid scams or predatory terms.

How to Avail Personal Loan Responsibly?

One must be borrowing money responsibly. Given below are some smart steps to protect yourself:

A personal loan can be a financial support in case of urgency but only if it is used wisely. Is personal loan safe? It is safe still it is not free money but is a liability. Before borrowing, you must ask yourself following 3 important questions:

• Do I really need this loan?
• Can I afford the EMIs comfortably?
• Have I compared all options?

By understanding the risks and through proper planning ahead, you can borrow smartly and avoid costly mistakes.

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