Personal loans can help you solve a number of financial problems. They can help in debt consolidation. They can be used for home improvement. They can also be used to improve credit score. There is a flip side to the story as well. A number of lenders impose penalties on borrowers, not because of a default in the repayment of a personal loan, but because of its early repayment. Thats right. Repayment of a personal loan before the expiry of its loan period makes the borrower to pay early redemption penalty.

The worst part is that, most of the people in the UK are not aware of the fact that lenders impose penalties on the borrowers who repay their personal loans early. Since the interest rates are at all time low levels, many borrowers manage to repay their loans before the loan tenure ends. Moreover, lenders offer low rate second loans, i.e. if a borrower has already taken out a loan, he is offered a new loan at a lower rate of interest to replace the existing loan. What borrowers do not know is that they will have to pay early redemption penalty. This takes away the advantage of a low interest rate.

In the early stages of loan tenure, a major portion of monthly installments comprise of interest, which results in a large amount of unpaid loan. The early redemption penalty is charged on this unpaid loan amount. This results in the imposition of a heavy penalty.

So far, we have discussed about the problem that may arise as a result of early loan repayment. Let us now discuss about the non-repayment of a personal loan. If you default in the repayment of a personal loan, you will acquire a bad credit score. A bad credit score will hamper your chances of getting a fresh loan in the future. A more serious problem arises when the loan is secured against a property. In this case, your property may be repossessed by the lender. To avoid this, lenders offer insurance policies and payment protection schemes. Such policies and schemes cover your loan repayment in the event of death, disability, sickness or involuntary job loss.