Personal loan can be one of the options when a person gets strapped for funds, it can help in closing the budget gap or meeting an immediate financial requirement. Whether it’s for house renovation, covering medical and educational expenses or paying off existing debts, a personal loan can be considered an ideal solution. However, with myriad of loans present in the market and each of them claiming their competencies, how would you make sure that you do not end up in a huge loan liability? So before signing on the dotted line, here are some personal loan mistakes that should avoid.
Not knowing your affordability
Most people tend to overstretch their finances by borrowing beyond their affordability. This situation could lead to financial crisis and default on payments, which will ultimately affect the credit report of a borrower. So it’s better to apply for a loan only when you can afford the monthly loan EMIs and other expenses.
Not doing a market survey
Before deciding a lender, it always pays to do a market research of what other lenders are offering. Compare the interest rate, prepayment clauses and other charges offered by other banks and choose the one that is suitable for your needs.
People often forget that personal loan is not the only option they have. A borrower should always compare and analyse key features, rate of interest, loan tenures, terms and conditions of other loans such as gold loans, loans against property, top up loans etc. before going for a personal loan. You can use the online loan aggregator sites for comparing the loans and choosing the right one.
Not choosing a familiar lender
Approaching a familiar lender or banker might work in your favour because they would be already familiar with your credit worthiness. It would also enable easy disbursement and quick loan processing. And probably it would get easier for you to negotiate on the interest rates and other charges of the loan.
Choosing longer tenures with low EMIs
Longer tenures seem like an easier repayment option but as a matter of fact, shorter tenure with higher EMIs are more cost-effective as compared to longer tenures with lower EMIs because the total interest pay-outs are lower. But before deciding the tenure, repayment capability and monthly budget should be taken into consideration.
Neglecting the fine print
Do not forget to read your loan agreement thoroughly, know everything about the interest rates, processing fees and other hidden charges. Clear every query related to the prepayment clauses. Banks generally do not offer pre-payment facility in the first six months and charge pre-payment penalties. Ensure that all your doubts get clear before taking the final decision.
Taking multiple personal loans
Taking multiple loans will increase your loan liability and would affect your loan eligibility. As the lenders would check your credit report which will show them that you are already occupied with several loan EMIs and granting another loan to you would rather be a risk to them. Hence they’ll avoid sanctioning loan to you, and if they do it, then your loan will possess higher EMIs which would ultimately disturb your financial picture.
Not being aware of credit score
Being financially disciplined client really pays you well and it makes sure that you have a good credit score. A person with good credit report is considered a good client and therefore the chances of getting loan approval are higher in that case. Be aware of your past credit records.
Personal loan comes with a flexibility to use it for any kind of household or personal financial requirements. Having said this, a borrower must understand the fine line between necessary and lifestyle based requirements. Considering the high interest rates and other charges of a personal loan, it is advised that a person should opt for a loan only when there is an urgent requirement of funds that cannot be postponed. It’s better to look at other options too before taking a final decision.