5 Costly Mistakes To Avoid When Getting A Personal Loan
Personal loans are often the preferred form of financing for insolvent people, not only to achieve their goals in life, but also to rescue them in an emergency. No collateral pledge, competitive interest rates, repayment terms of up to five or seven years, and the ability to process and pay off loans quickly are some of the reasons it is so popular.
However, it is important that you make informed financial decisions when applying for a loan to avoid unpleasant surprises later. To help you in this regard, here are some costly mistakes that you should avoid when taking out a personal loan.
1. Don’t compare the options
All personal loans available in the market may not be the same in terms of costs and other aspects. Hence, it can be risky not to compare loan products. You can easily compare the options in an online marketplace based on your eligibility and needs. You should also not ignore the pre-approved offers from your bank and your chosen online marketplace for faster loan disbursement. Applicable interest rate, maximum loan volume, processing fee, term options, admission requirements, digital loan processing option, etc. could be some comparison criteria.
As for interest rates, here are the lowest personal loan rates currently offered by some of the leading banks in the country. Note that the interest rate that applies to you may be higher depending on your selected lender’s age, income, occupation, creditworthiness, loan amount, or other terms and conditions.
Data compiled by BankBazaar on July 1, 2021. * HDFC Bank rack rate.
2. Do not check your creditworthiness before applying for a personal loan
Your creditworthiness is one of the most important ways in which your creditworthiness is assessed by lenders. If your score is above 750-800, you may be offered the lowest personal loan interest rates available, among other things. However, if it is well below 750, your applicable interest rate is likely to be much higher than the lowest available interest rates, resulting in higher EMIs at best and denial of the application at worst. Hence, in order to get the best loan repayment terms, you need to check your creditworthiness before applying for a personal loan. If it doesn’t meet the requirements, the first thing you should do is take corrective action, such as settling any outstanding credit card fees, to improve your credit score. Note that it is also wise to compare your options, but only apply for the offer that best suits your needs, as any application can result in a tough query that could reduce your credit score.
3. Don’t read the fine print of the loan
Different lenders have different personal loan terms and conditions. For example, one lender may impose a heavy fine on prepayments to complete your loan earlier, while others may not impose any fees. Reading the fine print of the loan agreement before signing it can therefore help you to fully inform yourself about all the associated conditions.
You may be eligible for a large loan ticket if your actual funding needs are much lower. However, all you need to do is borrow an amount that suits your needs and not a cent more. Over-indebtedness could put an unnecessary strain on your finances and make it difficult for you to pay your fees in full on time. Any negligence in repaying the loan would incur additional penalties and would also affect your creditworthiness, putting your borrowing ability and future credit requirements at risk.
5. Do not evaluate the affordability of the new loan
Personal loan interest rates can vary from lender to lender (as shown in the table above) and can range from 8.9% to 24% pa or even higher. Therefore, it is extremely important to evaluate the affordability of your personal loan EMIs according to the interest rate that applies to you, especially if you have other loan repayments to do as well. Ideally, all of your debts should not exceed 40% of your monthly household income in one month.
If the new credit EMIs were to bring your total debt obligations above this mark, consider getting a lower interest rate from another lender, lowering your loan amount, or looking for a longer term to keep repayment obligations under control. Also, if the best available interest rates are high due to your low credit rating, you can also consider secured loans such as gold loans, loans against real estate or mutual funds, etc. based on feasibility instead of an unsecured loan.
(The author is the CEO of BankBazaar.com)