What are the risks of loans?

If you take out a loan, you should also consider in advance the risks that go with it. The longer the term and the higher the loan amount, the more important it is to hedge against the non-payment default. Above all, property and asset risks, personal risks, financing risks and life risks should pay particular attention to future borrowers.

Even though many borrowers do not pay enough attention to meaningful hedging, risk management should make up a significant part of the loan considerations. Above all the financing risk should be considered in the planning.

Minimize financing risk

In order to minimize financing risk, careful and careful calculation is indispensable. The goal is to be able to handle the financing in the long term and also in case of unforeseen events. This means that not only unforeseen loss of earnings cause no problems, but refers to the long-term loans on the financing risk of the fixed interest period. Before borrowing a long-term loan, a borrower should be aware of how much he would be affected by higher interest rates and how likely he is that he is financially overburdened by the monthly installments. For this, he has to keep an eye on how big the remaining debt after interest rate expiration, on the other hand as early as possible to avoid expensive refinancing.

Hedging against life risks

Life risks can also cause considerable financial problems if the borrower does not sufficiently hedge against them. Many banks offer a residual debt insurance for such cases, which can be concluded together with the loan agreement. However, this is not always the best choice for the borrower. For example, most life insurance policies, disability insurance and survivor insurance offer better value for money. Potential borrowers should also be careful not to double insure themselves and thus use savings potential.

Minimize material and asset risks

Minimize material and asset risks

In principle, each policyholder should secure items that he buys with a loan, at least until the full loan is repaid. Especially when purchasing a home, this step is exceptionally important. If damage occurs at a higher level during the term of the loan, this may even result in further use and thus financing becoming impossible.

In addition, no borrower should waive liability insurance. It does not cost much but protects against significant financial risks.

How can I protect myself against credit risks?

How can I protect myself against credit risks?

Before the loan is completed, a list of existing insurance and a risk self-assessment should be made. The risks are listed specifically with respect to the loan to be included and evaluated according to their importance. In order to assess the relevance of a single risk, it should be considered how likely it is, and how large the damage would be when the risk occurs. Afterwards it will be worked out which way and at what cost the risks can be avoided.

In determining the risks, a financial adviser is often unavoidable. He knows about risks that individuals may not notice on their own, and can also assist in assessing risks. However, while potential borrowers should be open to meaningful risk management, they should not be overly influenced. Hedging against the most important risks is in most cases quite sufficient. Against every danger you can never achieve complete protection

11 thoughts on “What are the risks of loans?”

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