The Risk of Bank Loans
There are plenty of benefits associated with bank loans, but there are risks for you and the lender. The lender will take the risk of lending you money but not getting repaid in full. Your risk is that your own personal financial health could suffer as you could lose money or even your home. Risks are then minimized by careful underwriting by the lender.
So what are the risks of bank loans?
A bank loan will add debt and depending on the size of the loan this could be thousands each month. This can then prove to be a burden even when you carefully examine your budget.
There is also the possibility that your financial situation could change without warning due to illness or job loss. This means that a payment, which was manageable one month, could be impossible the next month.
It is then important to ensure that loan payments are not beyond your means.
If you find yourself in a situation where you start to miss payments then it will negatively affect your credit score. This will show once you are more than 30 days late and this is reported by the banks to the credit bureaus. If you continue to miss payments then you could ruin your credit. Once your credit score declines it can take years to repair it and will hinder your chances of getting finance in the future.
If you have taken a loan, but have secured it against an asset then you could lose that asset if the loan goes bad. If you are 90 days past due then you will receive a default letter from the bank that will demand the repayment of the loan. If you are not able to pay then the bank will start foreclosure proceedings. This is where the bank is able to take the asset that is secured against the loan like your home.
The asset will then be sold at auction and the money is used to repay your debt.
Risks for the Bank
The bank will also take a risk when they lend money. When they have to recoup loan loss the legal fees are expensive and the bank will rarely get the full loan amount back. When there are too many bad loans the banks profit will suffer and if a number of banks carry bad loans then rates can go up and this could lead to a negative effect on the economy.