The 3 Biggest Risks of Taking Out a Personal Loan

Updated - First published on Feb. 6, 2020

Christy Bieber

By: Christy Bieber

Writer

Many or all of the products here are from our partners that compensate us. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.

Taking out a personal loan could hurt your finances if you aren't careful. You'll want to be aware of these three big risks before you borrow.

Personal loans can be a good way to borrow money when you need to. After all, these loans have set payment schedules, so there are no surprises -- and the interest rates you'll pay are often well below what you'd be charged if you used a credit card. 

But while there are benefits to using a personal loan to access funds you need, there are also some major risks you could face when you take out this type of loan. Here are three big ones you need to be aware of. 

Featured offers: compare interest rates for the best personal loan options here

1. Not being able to make your payment

The single biggest risk to taking out a personal loan is not being able to afford to keep your commitment to your lender. If your monthly loan payment is too high for you to make and you default on your loan, you could find yourself dealing with serious financial consequences. 

In addition to damage to your credit score, you could also face legal action. This could lead to a court judgement against you that potentially could be enforced by garnishment of your wages or a lien being put onto any property you own. 

To make sure this doesn't happen, find out exactly how much your personal loan payments will be and see how they will fit into your budget. If you find you can't easily afford the payments, don't borrow.

Many people also default on loans because of a job loss or medical issue. To guard against this risk, aim to save up an emergency fund with several months of living expenses before you borrow. That way, if you lose your job or can't work because you get sick, you'll still have money to pay your loan. 

2. Getting too deeply into debt

If you take on a personal loan and commit to making monthly payments, this debt could interfere with your ability to accomplish other goals you may have. That's because your income will now have to go toward paying your loan off instead of doing other things with your money, such as saving for retirement.

You want to avoid tying up your future income by taking on a lot of debt or by taking on any unnecessary debt at all. So before you take out a loan, consider whether you really need to borrow and whether getting into this debt is worth the sacrifice your future self will have to make as you pay it off. 

The risk of getting too deeply into debt is even bigger if you are taking out a personal loan to consolidate debt and using the loan proceeds to repay your credit cards. If you pay off your cards and free up your credit limit, you could end up charging on the cards again if you are spending beyond your means. This could leave you with both the personal loan payment to make and a bunch of new credit card debt you have to repay. 

To avoid this, make absolutely sure you're skilled at living on a budget and not overspending before you consolidate credit card debt using a personal loan. 

3. Hurting your ability to borrow in the future

Lenders will not give you a loan if they feel that you have too much outstanding debt relative to your income. If you take out a personal loan, the payment on it will be factored in when your debt-to-income ratio is determined.

This could become a big problem if you borrow now and need to take a loan for something else later before your current loan is paid off. Say you take out a loan for your wedding. If that loan is too large relative to your income, your debt-to-income ratio could be too high for you to qualify for a home loan with your new spouse next year.

To avoid this risk, don't borrow for anything unless you absolutely need to. And if you do borrow, always keep your loan balance as low as possible and try to ensure the total outstanding amount of debt you owe -- including loans and credit card payments -- stays reasonable relative to your income. 

Minimizing these personal loan risks is worth the effort

Any time you're thinking of borrowing money, you need to know the risks going in. By understanding these three big potential risks of taking out a personal loan, you can hopefully take steps to minimize them so your decision to borrow doesn't have an adverse impact on your future.

Our picks for the best personal loans

Our team of independent experts pored over the fine print to find the select personal loans that offer competitive rates and low fees. Get started by reviewing our picks for the best personal loans.

Our Research Expert

Christy Bieber
Christy Bieber icon-button-linkedin-2x

Christy Bieber is a full-time personal finance and legal writer with 15 experience. She has a JD from UCLA and is a former college instructor.

Related Articles

View All Articles Learn More Link Arrow
Are CDs a Good Investment for 2024?
Steven Porrello

By: Steven Porrello | Updated - First published on Nov. 28, 2023

Certificates of deposit (CDs) offer high guaranteed returns in exchange for locking your money up at a bank or credit union for a term that you choose. While lackluster in previous years, CD rates have taken off in 2023, aided in large part by the Federal Reserve's continued interest rate hikes. These days, it's not rare to find a short-term CD paying out at a rate above 5%, with some paying out as high as 5.70%.With only a few weeks left in 2023, many of these CDs look like good investments going into the new year. But are they? If you're thinking about investing in one soon, let's take a look at what we know.Short-term CDs could make great investments, but don't ignore longer termsRight now, you can find the highest rates on short-term CDs, like those ranging from three to 18 months. For example, on Raisin's CD marketplace, all the CDs paying above 5% are within that short-term range.This isn't a coincidence. Rather, it reflects the expectation that interest rates will fall sometime in the future. Banks want to keep their CD rates competitive, but if they're paying 5.70% for five years, they could end up losing money.If your goal is to earn interest at a high rate, a short-term CD could be a good investment, especially if you're hesitant to lock into a longer term. Now might even be the best time to build out a CD ladder, combining short and long terms to stretch out today's high rates for longer periods.That said, I wouldn't ignore long-term CDs on the grounds that their rates are lower today. It's possible the Fed could start reversing course in 2024, hiking down rates to a more sustainable level. If that holds true, today's short term CDs could very well mature at a time when CD rates are much lower. You might lock into a 5.70% CD for six months, but a 4-year CD at 4.50% could freeze an elevated rate for a few years longer.A no-penalty CD could make a good investmentA major problem with CDs is that they come with early withdrawal penalties. These penalties are often equal to a few months worth of interest, though some could be as high as six to 12 months. If you withdraw from your CD before your term is up, you'll pay this penalty, which could sometimes result in you losing money.One way around this is to get a no-penalty CD. These CDs typically have a very brief no-withdrawal period, usually seven days or less, after which you can liquidate your CD account with no penalty. Traditionally, no-penalty CDs have low interest rates compared with regular CDs with the same term. But in today's high rate environment, you could easily pick up a no-penalty CD with an APY above 5%.For example, Raisin has several no-penalty CDs on its marketplace. As of writing this, the highest paying no-penalty CD comes from Greenwood Credit Union with a 5.37% APY and 12-month term. Other close contenders include Technology Credit Union (5.36%, five-month term) and Mission Valley Bank (5.35%, three-month term).What's great about these CDs is that you could break your contract to capture a different APY or longer term at a later date. Let's say, for instance, that the Fed indicates it's going to start lowering interest rates in 2024. You decide you're going to lock into a 4% rate on a 3-year CD. If you have your money tied up in a no-penalty CD, you could easily navigate out of the contract and open a new CD account. Likewise, if you have emergency savings, a no-penalty CD could help you earn at a higher interest rate, though I would recommend you consider a high-yield savings account first.Will CD rates stay elevated in 2024?CD rates are at a two-decade high, but they won't stay this high for much longer. Once the Fed feels confident inflation is under control, it won't be long before rates start to fall. I'd say if you're in the market for a CD, now is a great time to lock into one of today's top paying CDs. Take a look at different terms and see how much interest you could earn in 2024.
What Happens if Someone Sues You for More Than Your Car Insurance Will Pay For?
Christy Bieber

By: Christy Bieber | Updated - First published on Dec. 2, 2023

Car accidents can be extremely expensive. In fact, according to the National Safety Council, the average economic costs of a fatal crash were close to $1.78 million, while the average costs associated with a disabling car accident were $155,000.Despite these huge potential costs, drivers aren't required to buy nearly that much insurance. In fact, depending on the state, drivers may be able to get away with having just $15,000 per person and $30,000 per incident in bodily injury liability coverage.With such low auto insurance limits, it's very possible a motorist could cause an accident and do much more damage than insurance will cover. The big question then is, what happens if a motorist causes an accident and is being sued for more than the insurance policy's maximum limits?Drivers could be sued personally for any extra losses insurance won't coverIf a driver is sued for more than the limits of their liability insurance policy, their auto insurer will only cover legal fees and damages up to the amount required based on the policy terms. So a driver who caused $155,000 in disabling injuries to someone and who had $15,000 in bodily injury liability coverage would see their insurer pay just $15,000 -- leaving $140,000 in uncompensated losses for the crash victims.These losses don't just go away, and in some cases, victims will decide to pursue a lawsuit against the at-fault driver personally. In other words, they will go to court and try to get a judgment that the driver would have to pay out of their own bank account. And, depending on the circumstances, courts could potentially enforce that judgment by ordering the at-fault driver's wages be garnished (a portion of them is taken) or by putting a lien on the at-fault driver's property (asserting an ownership claim to their home or other assets).Because of the risk to personal assets, having only the minimum auto insurance coverage is a huge risk.Be sure to buy the right auto insurance coverageDrivers should think very carefully about whether they will end up regretting purchasing only minimum coverage insurance. It's true that it is cheaper not to buy a ton of liability protection, but that's only if nothing goes wrong.Switching from a car insurance policy with a $10,000 per person and $20,000 per accident limit to a policy with a $250,000 per person and $500,000 per accident limit raises premiums by around $47 per month for a 40-year-old female SUV driver in Florida with a clean record purchasing coverage from a major insurer. That's a significant bump, but it's a lot less than getting stuck with a personal lawsuit that ends up costing tens or even hundreds of thousands or millions of dollars.Being sued personally after an accident and not having enough insurance could be a really devastating, frightening experience, and the only way to prevent this from happening is to have the right insurance in place before this occurs. Drivers should review their policies today to make sure they aren't at risk of huge losses if a crash occurs. Those who find they don't have enough coverage to protect their assets may want to act quickly by increasing their insurance coverage ASAP.
These Are the 8 Auto Insurance Providers That Had the Best Rates in 2023
Kailey Hagen

By: Kailey Hagen | Updated - First published on Dec. 3, 2023

Auto insurance premiums averaged about $3,017 per year in 2023, up from $2,875 in 2022. And in all likelihood, they'll probably climb higher next year. That makes it crucial for drivers to shop around to ensure they're getting the best possible rate on their 2024 auto insurance.While a company's prior-year rates aren't always indicative of what they'll charge the next year or any given individual, it can still give drivers some idea of which companies they might like to include in their search. So with that in mind, here's a closer look at which top insurers offered some of the most affordable premiums in 2023.The eight companies with the best auto insurance rates in 2023The following eight companies had the lowest average annual premiums among large auto insurers in 2023, according to our data:USAA: $1,844*Geico: $2,104Erie Insurance: $2,273Travelers: $2,343Progressive: $2,587Nationwide: $2,697State Farm: $2,770Farmers: $2,825* USAA is only available to active-duty military members, veterans, and their family members.It's worth noting that these are averages from across the country based on several driver profiles, including drivers with accident histories and DUIs as well as young drivers. Those with clean records will likely be able to snag a policy for less than the rates listed above. And drivers with blemishes on their record will likely pay a bit more than the prices listed here.How to find the best auto insurance rates in 2024Auto insurers may be adjusting their rates for 2024, but the principles for finding the best coverage remain the same. The most important thing a driver can do is shop around and compare quotes before making any decisions.Each company weighs risk a little differently, which is why each one gives a driver a different quote. Some might penalize drivers more heavily for accidents, for example, while age may play a bigger factor in premiums with a different insurer. Insurers don't publicize how they come to their premiums, so getting a quote is the only way drivers can know which will offer them the best deal.Auto insurance discounts can help reduce premium costs, but more discounts doesn't always guarantee a lower rate. Still, if you have special circumstances, like being in the military or owning a hybrid vehicle, it doesn't hurt to look into companies that reward drivers for these factors.Those who are open to it should also consider enrolling in a driver monitoring program if their insurer offers one. This is an optional service many companies make available to customers who are willing to demonstrate their good driving habits. It usually comes with an upfront discount for enrolling.Finally, drivers can keep their premium costs down by raising their deductible. This means they'll have to pay more out of pocket in the event of a claim. But this might not be a big deal for those who are able to save up for the deductible in an emergency fund.It's possible that drivers could still pay more for car insurance in 2024 regardless, because of inflation. But it's still worth taking the steps above so drivers can be sure they're getting the most affordable rate. And if there aren't any great options right now, consider shopping around again in a few months to see if anything has changed.
5 Awesome Christmas Gifts at Costco for Under $50
Maurie Backman

By: Maurie Backman | Updated - First published on Nov. 27, 2023

The holidays can be a financially stressful time. There's so much pressure to spend money, which is tough if you're someone who's trying hard to put more into your savings account.The good news, though, is that Costco has a host of great gifts available right now that will result in a credit card tab of less than $50. Here are some worth looking at.1. The Babysitters Club: 18-Book CollectionHave an avid reader in your household or family? Costco has an 18-book collection of The Babysitters Club series available online for just $31.99. That's less than $2 per book!If you're a teacher looking to give a holiday gift to your students, you could also buy a set like this and give each child a single book (the series is pretty easy to follow even if you read the books out of order). Do note that Costco prices can vary between what you see online versus stores -- but in-store prices tend to be even more competitive.2. The Ultimate Tie Dye Kit & WorkstationHave a child who's crafty, or looking for that sort of gift for someone in your life? Costco is selling a tie dye kit for $24.99 online right now. It comes with 24 different colors in pre-filled bottles, latex-free gloves, and more.It's also worth noting that while this kit is rated for kids aged eight and up, it's the sort of thing that probably requires some amount of parental supervision for pre-teens. So if you're looking for a more independent activity for your kids, you may want to stick to a basic arts and crafts set.3. Costco Wholesale Unisex Logo HoodieKnow someone who's a huge Costco fan? For $26.99, they can show off their love of Costco all day and night with a unisex sweatshirt. It comes in black, gray, and white, and online reviews indicate that it's warm and high in quality -- just like you'd expect from Costco.4. Vacu Vin Wine Set Elegant, 5-pieceHave a wine lover in your life? This five-piece set for $34.99 could really make their day. It features a corkscrew, an active cooler that chills wine within 15 minutes, a serving spout, and a stopper for those nights when you can't polish off a bottle in its entirety.If you have a friend or family member who's recently moved to a new home, this could also double as a housewarming gift.5. Rocky Mountain Chocolate Factory Chocolate Favorites TowerWhen you're not sure what to get someone you love for the holidays, chocolate is a good option to fall back on. And if you act very quickly, you can snag a Rocky Mountain Chocolate Factory tower for only $39.99 online as a Cyber Monday special (the regular price is $54.99). This assortment features milk and dark chocolate toffee, chocolate-covered pretzels, dark chocolate almond clusters, and more. It's also a great gift for someone who doesn't have a lot of storage space at home and might appreciate an item they can consume and then be rid of.These items are just five of many you can score at Costco for less than $50. It pays to browse online or head over to your local warehouse club store to see what you can find to finish your holiday shopping list.
5 Awesome Christmas Gifts at Costco for Under $30
Maurie Backman

By: Maurie Backman | Updated - First published on Nov. 29, 2023

If you're stressed out about the number of holiday gifts you need to buy this year, you're no doubt in good company. And if you're short on funds, you may be wondering how on earth you're going to find something for everyone on your list without ending up with a massive pile of credit card debt.If you're a Costco member, though, you're in luck. The warehouse club giant has a host of products in store that make great Christmas gifts for under $30. Here are some worth checking out.1. Kirkland Signature Ladies' Cozy Fleece CrewneckIf you live in an area with cold winters, you can really never have too many warm sweatshirts. Costco is selling a Kirkland brand women's fleece top for $16.99. It's a longer length for added coverage and comes in a range of sizes and two colors -- oatmeal beige and purple. It's machine-washable for easy care and a great gift for that person in your life who always seems to be cold.2. Spyder Active Men's Long Sleeve ShirtWearing cotton during a workout can mean sweating up a storm only to have your shirt stay damp and cold until you're able to peel it off. That's just not a good feeling. So if there's someone special in your life with a tendency to hit the gym or go for a jog, this shirt makes a great gift. It's a moisture-wicking top that's perfect for an intense workout, and it features reflective shoulder detailing so that whoever wears it is more visible during those early morning or evening runs. It comes in blue, black, and gray in a variety of sizes for just $15.99.3. Fun With Mouse & Friends: 6 Picture Book Box SetIf you need a holiday gift for a book-loving toddler or preschooler, you should consider this set. It features fun classics such as If You Give a Moose a Muffin and If You Take a Mouse to School. At $26.99, you're only paying about $4.50 apiece for six hardcover books. The set also includes a bonus poster.4. Life Comfort Reversible Sherpa Fleece BlanketThrow blankets are a good gift for pretty much anyone. And Costco is selling a reversible sherpa fleece throw for $19.99. It's large enough to fit a queen- or king-sized bed and is machine-washable for easy care. Choose from mutli-colored, gray, or dark gray, depending on your recipient's taste.5. Cuisinart EasyPop Hot Air Popcorn MakerA big reason some people like going to the movies is getting to enjoy a bag of freshly popped popcorn. Now, your loved ones can experience that from the comfort of home -- and save the money they'd otherwise have to spend on a ticket. This popcorn maker produces up to 15 cups of popcorn -- enough to feed a crowd. And all of its removable parts are dishwasher-safe for easy cleanup. You can find this gadget for just $23.99.All of the items above are available on Costco.com, and the prices listed reflect what you'll pay online. But Costco often has lower prices at its warehouse club stores. So if money is tight this season, it could pay to brave the crowds and do your holiday shopping in person. You might end up spending even less on the gifts you're looking to buy.
View All Articles Learn More Link Arrow