Top 12 Mistakes to Avoid While Taking Your Personal Loan
Financial emergencies to land up without any warning and these emergencies knock at our doors at the most unexpected times. However, when a financial emergency shoots up, one does not need to worry because there are multiple options available from where you can get funds. The most common and popular source is relying on personal loans. The demand for personal loans has been going up with each passing day. One of the downsides of a personal loan is that a higher rate of interest gets accompanied by it.
The only trick is to understand your financial needs adequately, and make a decision wisely, which does not hamper your budget. Making mistakes is expected as we all make, but a financial mistake could end up costing you a bomb. Hence, if you are looking to get your hands on a personal loan, make sure you go through this guide correctly, which lists all the potential mistakes you could make. Avoid these mistakes to keep yourself in a secured position.
12 Common Mistakes to Avoid While Taking Your Personal Loan
1. Less Clarity with the Purpose of Loan:
The most significant blunder which most of us commit is that people fail to recognize a thin line between an essential loan and a lifestyle-based personal loan. We should be aware that the interest rates and the other charges levied on personal loans are on a higher side. This is why one should avoid personal loans and only go for them when they are left with no other option until at that time. There are multiple sources that provide personal loans such as financial institutions, credit unions, online leaders, etc.
2. Not Checking for your Credit Score:
A credit score is the backbone of most personal loans. Hence, you must check your credit score often. This is because any lender will only sanction the loan amount post checking your credit score. If your credit score is below 630 out of 800, it will be tough for you to get a loan. It is the duty and the right of a lender to check your creditworthiness. Lack of a decent credit score can result in higher interest rates, lesser duration to repay the loan amount, or rejection. But the brighter side is, a credit score is not fixed, and you can always improve your credit score and then avail yourself a loan at a lower interest rate.
3. Not Doing Your Homework Properly:
It is always a sensible idea to do your homework. This primarily means that you should make a list of the potential lenders and then compare the different options. If you are tempted to borrow just from your bank because of the security functions or trust, then you should hold your horses. Compare all your options thoroughly and see if you can end up boiling down to a lender who will provide you with a low-interest rate and a longer duration to repay the loan. For example, for a sum of 25 lakhs, the ‘X’ source might be lending you at an 8% Interest rate for ten years, and the ‘Y’ source might be lending you at an 8.5% rate interest rate for ten years. You know who to pick in this situation, i.e., source X, as it is giving the loan for the same amount at a lower interest rate.
4. Borrowing the Loan Beyond the Repayment Capacity:
It is very natural to get overwhelmed by something or a situation and borrow an unreasonable amount that is far-fetched from our capacity. It is essential for you to carefully evaluate your current situation and anticipate the future situation, to understand your EMI’s repayment capacity. There are personal loan calculators available, which help you get an idea about the future EMI’s. This gives you a brief idea about whether you should take or not take a loan, depending on your repayment capacity. One should be very careful while taking a personal loan because it will severely affect your CIBIL score if you end up defaulting it.
5. Applying for Multiple Personal Loans:
This is the usual situation that a borrower goes through when they need funds. In times of emergencies, you make desperate moves and apply for a personal loan from multiple lenders. Hence, when the lenders process your application, they make a hard inquiry that broadly reflects your credit score. In case, numerous hard inquiries are reflecting in your statement; it will negatively affect your CIBIL score. Also, a credit-hungry situation might not be favorable for you, because either lender will avoid giving you credit or take advantage of the situation and charge you a higher interest rate. Hence, make sure to calm yourself even during emergency times, not go out in the market, and blindly start approaching any and every lender.
6. Not Choosing the Right Tenor:
Each individual is different and their paying capacities are based on their monthly incomes and assets. There might be a few borrowers, who would want to repay the loan amount at the earliest and sign up for a short tenor. On the other hand, a few borrowers cannot repay the amount so early and end up taking their own time to repay. Hence, this decision should be made wisely without hurrying, and the only advice for you is to follow a practical approach. Generally, a shorter repayment term comes with a higher rate of interest as well. To avoid this situation, make a wise decision to use a personal loan calculator to estimate your monthly EMI’s well in advance and then plan your monthly repayments accordingly. Choose a realistic repayment term, as a strain on your finances might end up you defaulting your repayment.
7. Not Checking the Additional charges:
The common practice is that most lenders charge a certain fee when lending a personal loan. These charges or fees could be administrative fees, processing fees, foreclosure fees, etc. Hence, as a responsible borrower, you must read all the terms and conditions adequately mentioned in the offer document so that you do not get shocks later on about the lenders’ various fees. Proceed with the application, only if you agree with the fee structure. Make sure to have transparent communication with your lender, to avoid any miscommunications later on. Also, there are a few lenders who charge obnoxiously higher fees for no reason. Make sure you stay away from such lenders, which is why It is so important to do your homework thoroughly.
8. Taking a Personal Loan Without Any Purpose:
In some situations, we end up taking a personal loan, even when we do not need it so badly, and we could do without that loan amount. Hence, it is only advisable to take a personal loan when you have some emergency or real financial needs. Taking personal loans for fulfilling your luxurious needs such as throwing a party on your birthday at a 5-star restaurant or going for an expensive holiday does not make sense. This will only end up putting a huge financial burden on your head. Therefore, be very wise when you apply for a personal loan.
9. Settling for Less:
A significant chunk of society ends up taking personal loans based on instant approvals or referrals. Though we won’t call it a bad idea by any chance, you might end up losing out on some of the vast offers, if you fail do look around and do your research. If you are in a hurry and need the funds immediately, you might go for instant personal loans, but that will surely cost you later. Instant personal loans come with a higher rate of interest. On the other hand, if you show some patience and wait for a little while, you can get the same loan amount at a much lesser interest rate. Though no doubt, the latter option will take a bit more time than the former option, it would also lower your credit burden by a considerable margin.
10. Not Checking for the Eligibility Criteria:
No lenders are the same, as each lender has a different eligibility criterion that revolves around multiple factors such as age, income, employment type, financial background, CIBIL score, residential location, etc. It is always better to go through the eligibility criteria in detail when applying for a loan. There could be times when you fit very well in a few criteria but lack in a few. You could take some time and work on that criteria and then apply for a loan to get a better interest rate. Applying for a loan without going through the eligibility criteria will only result in a rejection of the loan, thereby losing time and effort.
11. Signing Blank Documents:
This is a rule not just for personal loans, but it applies to each process you initiate in your life. When you apply for a loan, you would have to meet your lender, and gradually both of you build trust for each other. However, even if you become best friends, you have to keep your personal life away from finances. If the lender asks you to sign a blank document, you have to tell them no strictly. Signing a blank application form or document could land you in a big scam, about which you might not even know. Hence, make sure you are vigilant throughout the process of applying for a personal loan. It is essential to have complete knowledge of the entire loan process and the different steps involved in the process.
12. Not Disclosing Details of the Existing Loans:
Ideally, a lender expects the borrower to be very transparent and disclose everything about their past and current financial situation. This also means that the borrower should reveal the details of the existing loans currently serving while applying for a new loan. Although initially, one might end up getting sanctioned a higher amount if they hide these details, this can lead to a negative impact later on. It ultimately could put an extra burden on the borrower, as they would be required to stretch their monthly budgets when they would start paying off their personal loans.
Hence, it is always advised to borrow a personal loan amount that is under your budget, and you can pay it without defaulting the repayment. Keep the above points in mind, to save yourself from unnecessary hassles.