A personal loan is the best choice to fulfil your urgent financial needs. Availing a personal loan has never been this simple, especially with many lenders offering easy personal loan online, which is hassle-free and sometimes pre-approved. This has caused a huge spike in the demand for personal loans. But along with that, the incidences of bad debt have also increased.
Many people opt for a personal loan without the required financial knowledge or strategies. This results in a few common mistakes repeated again and again. So, in this blog, we bring you a few common personal loan mistakes that you must avoid.
Mistakes to Avoid When Applying for a Personal Loan
Here is a list of common mistakes that you should know about to manage your debt comfortably.
Not Taking Into Account Your Ability to Repay
A loan can assist you in escaping a financial crisis, but it can also put you in one. Access your finances and know your ability to repay before you apply for a loan. Never go overboard with the loan amount and keep it as low as possible. But the amount should also meet your financial obligation. Thus, before applying for the loan, make sure to use an EMI calculator to find the right balance of loan tenure, loan EMI and loan amount.
Approaching Too Many Lenders
Every time you approach a lender about a loan, a hard inquiry is sent to the credit bureau. A hard enquiry can impact your credit score negatively. Multiple inquiries also mark you as a “credit-hungry” applicant which lowers your chances of getting a personal loan.
Concealing Information About a Current Debt
Because the size of the loan depends on your commitment to other existing responsibilities, the lender must be made aware of all of your current loans and other financial commitments. If you attempt to conceal these facts, the loan may be declined, or the interest rate may increase.
Skimming Through the Paperwork
Read the fine print carefully to comprehend the loan’s terms and conditions fully. Read the agreement carefully to understand the charges, limitations and all other terms related to the loan. Knowing your loan in detail will help you make the right decision.
Not Adequately Evaluating the Options
Before choosing your lender, you must check out all the loan offers in the market. Compare the loan terms, prepayment policies, interest rates and fees of various banks and financial organisations. To ensure simplicity and transparency, it is best to use aggregators. Also, check out the personal loan apps they may offer you a great deal on the loan.
Choosing a Longer-term Loan With Lower Emis
Due to lower EMIs, borrowers often choose a longer loan repayment term. But remember the longer the loan repayment period, the higher will be your interest. In accordance with your ability to make monthly loan repayments, you are advised to select the shortest feasible loan term.
Not Checking Your Credit Report
Your credit score determines whether your personal loan application will be approved. Check your score and make necessary modifications before applying for a loan. Also, the likelihood that your loan application being denied is more if your credit score is poor.
Taking a Higher Loan Amount Than Required
Avoid going overboard and selecting a higher loan amount. Always create a concise budget before submitting the loan application. Keeping your loan amount as low as possible will result in a lower debt burden. The loan amount also impacts your total interest payout and your monthly EMI.
Longer Loan Tenure
Your EMI depends on the loan tenure. Opting for a longer tenure can result in lower EMI. But this will result in a higher interest payout. Personal loan offers flexible loan tenure of 12 months to 60 months, But ideally, you must opt for a loan tenure that’s no longer than 2 years. You can use a loan EMI calculator to get the perfect combination of the loan amount, loan tenure and loan EMI. Make sure your tenure is short and your EMI is affordable
A personal loan is a very helpful tool, but you must use a loan in a responsible way to avoid falling into a debt trap. Yet, applying for a personal loan online without performing adequate due diligence can affect your family’s financial stability.
Keep these pointers in mind and do not forget to conduct thorough research before looking for funding sources. Analyse your needs and browse your options, and take your time to make the right decision. A personal loan is a long-term commitment that is going to impact your finances for the coming months. So, make an informed and conscious decision, and avoid repeating the common mistakes.