Top 5 Mistakes You Must Avoid While Applying for Personal Loan

It’s a late evening at work when you just realise it’s your wife’s birthday in a couple of days and that you had promised her an expensive gift. Staring at the end of the month, your money situation is tight. Enter personal loans😊

You frantically look up online and sign up for the first offer that crosses your eyes. In our busy work lives, many of us can relate to this, can’t we?

Personal loans involve a high-interest rate and so, a wrong move can mess up your finances big-time.

In this article, we share the top 5 mistakes you must avoid while applying for a personal loan.

Mistake # 1: Not comparing different options and reading the fine print

On the face of it, while all personal loans seem similar. But if you delve deeper and read the fine print, you’ll come to know the vast differences between various offers. You’ll also come across various low-interest personal loans that you may have otherwise missed out on.

Do make it a point to check on the following points:

The reputation of the lender (beware of shady agencies and unverified mobile apps)

• Annual Percentage Rate (APR) of the loan
• Processing and late payment charges
• Prepayment and foreclosure penalties
• Flexibility in repayment

Mistake # 2: Not paying attention to your credit score

Do you think no-one tracks your late EMIs, credit card defaults and applications to multiple lenders? You’re wrong. Everything gets tracked to determine your credit score.

When you apply for a personal loan, lenders check this score to check your creditworthiness. Based on that score, they decide whether to give you the loan & the interest rate to offer. So, if you’ve never bothered to check your credit score, you’re in for a hard time.

But better late than never.

Work towards improving your credit score by making timely payments and reducing your appetite for such loans. In the long term, it can help you get fast approval for cheaper loans.

Mistake # 3: Taking a loan for a higher amount than necessary

Be careful not to get carried away and choosing a higher loan amount than what is absolutely necessary. Here’s why:

• The interest you earn from the extra money in your bank account is much lower than the interest payable to your lender. So, you end up with a net loss.
• Pre-payment penalties may apply, which make it a loss-making affair for you to prepay.
• Idle money lying in your bank account may tempt you into unnecessary spending.
• The higher EMI may cause you to default on your payments and hurt your credit score.

Mistake # 4: Taking a loan for a higher tenure than necessary

Your EMI is fixed basis the tenure of the loan. You may be tempted to select the highest tenure as the EMI is the lowest in that option. Don’t make that mistake!

Suppose you calculate the overall payment that you need to make across the various tenure options. In that case, you will see that it is very high for the longest tenure. The longer the tenure, the higher the proportion of interest component in the EMI. In longer tenure loans, the interest works out to a lot more than the amount of loan taken by you.

So, always try to choose a lower tenure loan. Also, ensure that the EMI fits your monthly budget.

Mistake # 5: Not keeping your family informed about the loan

Don’t forget to keep your family adequately informed; else, be prepared for the following:

• You miss out on your family’s inputs on alternative options like liquidating existing investments, getting a gold/top-up loan, getting financial help from a close friend, cutting on the expense, etc.
• If something were to happen to you, it can cause unnecessary financial difficulty for your spouse if she/he is not aware of your loan obligations.

Getting a personal loan for the right reason can help you bridge the last-minute cash crunch. However, signing up for such loans without proper due diligence can put your family’s financial well-being at risk.

Besides the 5 mistakes listed above, it is also important that you do your research well when looking for alternative methods of funding when in need. There are several options based on your requirements, and jumping at the first one is not always the wisest move. Also, don’t get tempted to apply for loans from various lenders – be organised and patient and apply to for a loan that fits your needs well.