Personal loans are unsecured loans; this means they are not backed by an asset. Another important feature of these loans is that they are not for a specific purpose as education or home loans are. Personal loan can be taken for going on a holiday, buying the latest gadgets or planning a wedding, etc. Apart from personal loan interest rates (which is the highest factor for consideration often); other aspects also need to be considered when applying for the loan. Here are the mistakes that you should avoid:
- Applying without giving it a careful consideration: The first question you need to ask yourself is: Do I really need a personal loan? Just because you got a mail or a call about a “low interest personal loan” does not necessarily mean it’s a good time to buy the latest LED. Remember there are no free lunches. So think hard about the loan’s utility and necessity. In case you really do need funds, explore other options such as borrowing against a bank deposit or PPF, and then decide. Remember pre-paying a personal loan has a penalty.
- Accepting the very first loan offered without comparing: Yes, there is an emergency and you need money but that doesn’t mean that you will accept the very first offer. You need to compare and then decide. How do you do that? It’s easy! Explore different banks who offer the kind of loan you need and various parameters like tenure, interest rate and processing fees on Paisabazaar.com and then make a sensible decision as per your repayment capacity.
- Borrowing more than you can pay: Agreed personal loans are available for any reason and unlike auto and home loans they are not sanctioned as a fixed percentage of the asset. The limiting factor here is your income and CIBIL score. However, beyond the numbers you need to be aware of other limitations as well. For instance, you will have to keep in mind unforeseen expenses that might create a liquidity crunch, such as expenditure related to your child’s admission in a new school. Your income eligibility criteria or CIBIL Score will not include such information so be realistic about how much EMI you can pay every month and then apply for the loan. Use our online EMI calculator to assess your repayment capacity.
- Not checking eligibility before applying: While applying for a personal loan, you will have to check on many factors apart from the right amount or tenure. It is equally important to check your eligibility too. Different factors like income, age, credit history, employer, job stability, etc. are considered by various lenders before offering you the loan. Before applying, go through the eligibility criteria and figure out the areas you lack so that you can improve them before facing any kind of rejection.
- Signing without going through the Fine Print: This is by far the most common pitfall. You may trust the financial representative to guide you and sign the marked spots and get over with it. In your trust and haste, you can miss out on reading and understanding the fine print that mentions such details as processing charges, prepayment penalty and any other hidden charges. Once the agreement is signed you do not get to plead ignorance.
- Hiding your existing loans, if any: Hiding about your existing loans from the lender is never a good idea as lenders will find out about them while checking your credit history and might reject your application immediately.
- Borrowing for an unrealistic tenure: Choosing the loan tenure must be done with great care. The personal loan tenure decides your monthly EMI and the total interest you end up paying. A longer loan tenure will translate into a lower EMI but a bigger interest burden overall. Also, it will limit your further borrowing capacity and prepayment will invite penalty. So even if you have spare funds you will be unable to prepay a loan without bearing the additional cost. On the other hand, if you choose shorter loan duration then you might find yourself burdened with monthly installments that are difficult to pay. Make sure the loan tenure is in line with the rest of your financial planning.
- Applying without familiarizing yourself with the bank’s rules: Generally, the rules and documentation regarding loans are similar across financial institutions (FIs). Before applying, check with the FI (you are applying to) whether online or by visiting their branch office, what are their specific requirements? If you do not meet their eligibility criteria whether it is on the income parameter or the CIBIL score or due to documentation, it is sensible not to apply for a loan to them. This way you will end up saving time and processing charges which you would otherwise lose if the application is rejected.
- Borrowing more than needed: You might get the thought of borrowing more money and spending it on various things, which are not very important. At the end, it is always a wise decision to take some limited amount as a loan and manage other expenses with your monthly income. Borrowing more than required will add more amount to the money you need to repay and the tenure will also be longer.
Personal loan work as a lifeline when you are going through a tough situation and need money. If you compare banks and discuss with your friends or family before applying and submit an error-free application, your chances of getting a loan instantly increases. Just keep the above points in mind and have a simple and stress- free process.
Also read: 10 Types of Personal Loan You Didn’t Know!