Want a Personal Loan? Avoid These Common Mistakes

Whenever you face a financial crunch, personal loans will always be at your beck and call to help you out of the situation. These unsecured loans, though high in interest rates, offer plenty of benefits that make it hard for people to ignore. With minimal documentation, hassle-free online application processes and pre-approved offers, getting personal loans has become even more convenient and quick solution to all your immediate financial needs.

With all the good things, there are some pitfalls concerning personal loans that potential borrowers must always be wary of when applying for it. Even a single mistake has a great deal of potential to make you fall in the debt trap and worsen your financial situation. If you are also planning to get a personal loan, here are a few things that you must always avoid so that you can comfortably manage your debt:

Not factoring loan repayment capacity

Personal loan can help you out of a financial crunch but also holds the potential to put you into one. Therefore, before applying for a personal loan borrowers must factor their repayment capacity. By repayment capacity we mean the ability of a borrower to repay the borrowed amount. Potential loan applicants must ensure that they borrow what they can comfortably repay to their lender. Taking personal loan of an amount more than you can afford will put more financial burden than you already have, which will later on be difficult to repay. Therefore, borrow as per your affordability and requirement and not as per what you want. You can also use an online personal loan EMI calculator to decide the loan amount as per your repayment capacity, before you apply for the loan.

Applying with multiple lenders in a short period

It is possible that you may not notice it but every time you apply for a personal loan, lenders initiate a hard enquiry. Hard enquiry is a credit enquiry made on the applicant by lenders whenever he/she applies for a line of credit such as loan or credit card. Such queries when raised reflect in your credit report, thus negatively impacting on your credit score.

A person with a credit profile reflecting frequent multiple enquiries is considered to be ‘credit hungry’. Therefore, when lenders come across such a credit profile, they become wary as they cannot be sure if that person will repay the borrowed amount on time or not. Such credit profiles more often than not have lesser chances of getting loan approval. Even if lenders agree to give them loan, it is, in most cases, is at a higher rate of interest.

Not being open about existing loan details

Your lender is supposed to know about all your debt obligations. The knowledge about your existing loan details will help them in deciding the loan amount that must be sanctioned. Hiding such information from them is not advisable as if they ever happen to find out, they may reject your loan application. Being open about such an information may get you loan. It further helps in setting an appropriate EMI (equated monthly instalment) so that you can fulfil all of your debt obligations on time.

Speed-reading through the paperwork

Most borrowers are concerned only about the loan amount and the applicable interest rate of a loan, which makes them focus only on these two details and skip the rest. Doing so must be avoided at all times. Borrowers must read all loan-related documents carefully so as to avoid future surprises or rather shocks. Read and understand each and every line of your loan documents. Examine all terms and conditions thoroughly and if there is something you don’t understand contact your loan officer regarding the same. In addition to the interest rate and loan amount, look at other applicable charges as well such as processing fees, pre closure charges and so on. It is essential for people to read and understand all clauses to avoid future disagreements and unnecessary charges.

Not considering all options available

There are various lenders in the market that offer great deals on personal loans. To get a deal that best suits your requirements; you will need to do some market research. Many potential borrowers take the first loan offer that they come across which makes them miss out on the opportunities to get a better loan offer. Therefore, borrowers must first consider all eligible personal loan offers before finalising one. When comparing different personal loan offers, do not just compare their interest rates, consider other applicable charges such as processing fee, closure charges, administrations fee, penalty fees and other such charges as well. It is best to use online aggregators to easily compare personal loan offers from different lending institutions in India.

Taking personal loan for a longer tenure

Your loan EMIs are directly proportional to loan tenure. Lesser the EMIs more will be the loan tenure or vice-versa. For instance, a person borrows ₹1 lakh for tenure of 3 years at 7% interest. For this person, the estimated EMI to pay off the entire loan amount will be ₹3,807/-. If we increase the loan tenure from 3 years to 5 years, then the EMI that he/she will have to pay will reduce to ₹1,980/-.  Often borrowers opt for longer tenure to repay loan due to lower EMIS. What they fail to understand is that even though longer loan tenure leads to lower EMIs but it also leads to high interest amount. Therefore, borrowers must try to select the shortest loan tenure possible, keeping their monthly loan repayment capacity in consideration.

Not checking credit report before applying for loan

Your personal loan approval is dependent on various factors and credit score is one of them. Therefore, before applying for a personal loan check your credit score so as to make sure lenders will not reject your loan request on the basis of a low credit score. Checking your credit score before applying for personal loan will also help you avoid unnecessary hard enquiries. If you find that your credit score is low, you can take measures to improve it such as clear off outstanding debt amount, keep credit utilization ration below 40% and so on. You can also check your credit report to identify possible errors and fraudulent activities.

(Disclaimer: This is a sponsored article and has not been edited)