Personal Loan Mistakes to Avoid

June 26, 2023

7 min read

Personal loans can fulfill your financial demands. It can get used for nearly anything, including emergency funding, debt consolidation, or making a sizable purchase. It has never been simpler to apply for a personal loan due to hassle-free online procedures and pre-approved offers provided by banks. Aside from having cheaper rates than credit cards, they also come with risks. Thus, you must be cautious before applying for a personal loan. Have a budget for repayment and be fully conscious of your credit score. Find a financial institution that best meets your needs by comparing the top offers. Without further ado, here is a comprehensive list of mistakes you should avoid.

Understanding a Personal Loan

A personal loan is a type of unsecured loan that gets offered by financial institutions. A personal loan can pay off sizeable purchases, home renovation, and medical expenses. You can also consolidate your debt with it. Unlike a mortgage or a vehicle loan, a personal loan does not require collateral. However, you can choose to get a personal loan as a secured loan. Depending on the lender, the terms and conditions can differ. Before signing, you must do your homework and know all loan terms and conditions. Know which type of loan is suitable for you and the possible risks and benefits that come with it.

6 Things to Avoid During a Personal Loan Application

Here are some pitfalls to watch out for while applying for a personal loan:

Taking out a larger loan without a budget

You need to create a budget before your loan application. Always determine how much you need when you apply for a loan. Even if you could be eligible for a large personal loan, you do not necessarily need to get more than you need. The amount you must repay increases as you borrow more. Bigger loans also come with higher EMIs. Your debt might spiral out of control if you cannot pay off your loan, including all your other ongoing obligations.

Not being prequalified for a personal loan

You can receive an idea of your chances of approval when you become eligible for a personal loan through prequalification. You can be confident that a soft inquiry, which lenders use to verify your credit, has no impact on your credit score. Before you agree to the loan, prequalifying can also assist you in making sure the EMIs fit inside your budget. It does not, however, ensure your loan eligibility. However, it allows you to shop for the best rates, terms, and lenders.

Disregarding your ability to repay

Check your ability to repay the loan before applying for a specific loan amount. A personal loan might save you from a crisis, and it can also put you in one. Use EMI calculators to determine the loan amount when you apply so that it is in line with your capacity to repay. A late loan payment also lowers your credit score. In addition, the majority of lenders charge late fees. Setting up automatic payments is an excellent method that guarantees your loan gets paid on time.

Not performing a credit score check

Collateral is not necessary for personal loans. As a result, your CIBIL score is crucial in convincing lenders that you can repay the loan. Hence, you must verify your credit score and make any necessary modifications. It has a significant impact on whether your loan application gets approved. Your loan application can get denied if your CIBIL score is poor. Better repayment capacity gets implied by a higher credit score, which can persuade lenders.

Not selecting the appropriate tenure

Remember, your payment will become huge with a long repayment period. Because of the cheaper EMIs, borrowers frequently choose longer repayment terms. Avoid selecting an EMI plan with an excessively higher amount, as it can make your monthly payments unmanageable. Depending on your ability to make monthly loan repayments, it is recommended that you select the shortest loan term available.

Asking more than a few lenders and not comparing your alternatives

Too many lender inquiries will raise questions and get recorded on your credit report. With each query, your credit score will become lower. Additionally, you will seem desperate, which lowers the likelihood of your loan application getting approved. Thoroughly investigate all your loan possibilities before deciding on a lender. Compare several lenders to determine if you can receive the same loan for less money.

Summary

A personal is one of the most dependable sources of procuring additional funds. It is readily available for anyone with a decent credit score or a regular income. But it is essential to manage your loan thoughtfully. If you decide a loan is necessary, do not decide in haste. You can use a personal loan calculator to estimate your monthly payments and expected loan payoff date based on your credit, the loan amount, and the term. Ultimately, you ought to do your research to get a loan with competitive interest rates. Get affordable monthly payments so you can pay the loan off in time and avoid consequences in the future.

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Personal Loan Mistakes to Avoid FAQs:

1. What are some of the personal loan features?

Personal loans sometimes come with affordable interest rates, quick approval processes, and flexible repayment periods. Some lenders additionally provide extra benefits for consumers with a better credit score and no history of default on a payment. The benefits can include lower interest rates, rewards programs, and cashback deals.

2. What are the repayment periods?

A repayment period is a defined time frame within which you should make your EMI payments. Most lenders provide repayment terms ranging from six months to five years. It gets widely known that the interest rate rises with a longer repayment term.

3. How much can you borrow from a personal loan?

Your qualifying requirements, income level, and credit score will all affect how much you can borrow from a personal loan. Most lenders would provide you with anything between 50,000 and 20 lakh rupees depending on your needs and capacity to repay them.

4. What are some of the documents needed for a personal loan?

Lenders typically demand that applicants provide records that prove their identification (PAN card), residence (Aadhar/utility bills/Passport/rental agreement), bank statements, and income (salary slips). According to your lender, you might also have to provide other documentation.

5. What happens if you fail to pay a personal loan?

If a cheque bounces, a lender can bring legal action against the borrower per section 138. According to RBI regulations, the borrower can be penalized. However, failing to make a loan payment is not a felony. So, a borrower cannot get arrested as a result.

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