Personal loans often come to rescue of the cash-strapped, making it one of the most sought-after financing facilities in the market. This collateral-less loan gives borrowers the freedom to use the fund to address any requirement – be it to renovate a house, to fund an educational course, to effectively tackle an emergency situation or even to make a big-ticket purchase. However, it is this collateral-less nature of a personal loan because of which it attracts a higher interest rate than other secured loans like a vehicle loan or even a home loan.
Aspiring borrowers with a stable income and a good credit score can easily avail a personal loan through online applications in a few days. However, it’s not uncommon for applicants, often in their desperation to seek credit, overlook certain important things which either lead to rejection of their loan application or turn out to be costly mistakes in the long run. So, if you’re looking for a personal loan, you’ll be well-advised to go through our list of common mistakes to ensure it’s an end-to-end smooth process.
TAKING A LOAN WHEN YOU DON’T ACTUALLY NEED ONE
With our phones buzzing and inboxes brimming with personal loan offers, some of us make the mistake of applying for a loan without thinking it through, especially when there’s no requirement for one. As a result, we unnecessarily enroll for a loan that involves an interest rate anywhere between 10 per cent and 24 per cent per annum among other charges. If you struggle to clear the dues on time you end up paying more in additional interest charges and late payment fees and also damage your credit score in the process. So, always apply for a personal loan only when there’s a clear requirement for it and when you’re not in a position to arrange for the funds without going for a financing facility.
TAKING A LOAN BIGGER THAN YOUR REQUIREMENT
Many among us are eligible for personal loans of large ticket sizes. But being eligible for a big loan doesn’t mean you should avail it in full. Simply because a higher loan means a higher repayment which will put extra burden on your finances during the loan tenure. As such, make it a point to closely evaluate how much you exactly require and apply for that much amount. Not a penny more.
NOT CHECKING YOUR CREDIT SCORE BEFORE APPLYING FOR A LOAN
A 750+ credit score should work in your favour when you apply for any kind of loan. A high score will not only ensure your application gets approved without any hassles but you’re also likely to be offered the loan with better repayment terms like preferential interest rates, added tenure flexibility and even waiver on charges like processing fees. So, don’t forget to check your credit score before applying for a loan. If your score is on the lower side, work towards improving it before applying for the loan by clearing all your existing dues like credit card payments or car loan EMIs. Also, check for any errors in your credit report which might have led to the lowering of the score. If you spot one, reach out to your bank immediately to get it rectified.
IGNORING YOUR REPAYMENT CAPACITY
It’s not uncommon for people to apply for a personal loan, often during a financial emergency, without closely evaluating whether they’ll be able to afford the repayments or not. They don’t factor in the associated interest charges and struggle to repay the loan which in turn leads to snowballing debt. Therefore, make it a point to get complete clarity on how much exactly the EMIs will cost you and go for the loan only when you think you’ll easily be able to repay it on time without disturbing other important financial commitments.
NOT READING THE FINE PRINT BEFORE APPLYING
Imagine this: you have taken a personal loan to address an urgent requirement but in a few months your finances stabilise and you don’t see a reason why should you continue bearing the interest charges of the loan. So you decide to pre-close the loan, but when you reach out to your bank for the same you’re in for a surprise that you need to make an additional payment as a pre-closure charge. So, it is important to read the fine print before applying to have complete clarity on your loan product and be on top of your repayment game.
A personal loan may come with many additional charges like pre-closure fees, lender swap charges, processing fee, cheque bounce penalties, late payment charges, tenure extension charges, so on and so forth. Equally important is to consider the fact that the document requirements are different for salaried and non-salaried or self-employed applicants. Non-salaried and self-employed applicants are mostly asked to submit additional documents like business ownership documents and tax returns, apart from usual KYC documents and bank statements, to ensure their application gets approved. As such, put in some effort to read the loan fine print and get clarity on all its aspects to avoid any unpleasant surprises later on.
APPLYING WITHOUT COMPARING YOUR LOAN OPTIONS
It’s not necessary your bank will always have the best loan offers for you. So, make it a point to compare different options and examine all the offers in detail to find the best deal. It’s only when you compare that you might realise that there are better options in the market for you to benefit from. These could be in terms of lower interest charges, higher loan amount or more flexible repayment terms – things that will help you find the perfect match to your funding requirement.
APPLYING FOR MULTIPLE LOAN PRODUCTS IN QUICK SUCCESSION
We suggested that you must compare different options before applying for a personal loan to find the best match. However, that doesn’t mean you should apply for multiple options in quick succession. Doing so will hurt your credit score which will deteriorate your chances of approval. So, carefully examine all the options but apply only for the product that best meets your requirement. Also, if your first loan application gets rejected due to, say, a poor credit score, wait until you’ve improved the same before applying for another loan offer.
These tips will go a long way to ensure you choose a personal loan product that’s aligned with your requirements while helping you to tick all the right boxes when it comes to being better prepared to deal with repayment. A personal loan is a great tool to address any funding requirement and may even help in realising a dream of yours. Don’t let any carelessness on your part dampen the results it is supposed to achieve.
The author is a CEO, BankBazaar.com