Personal loans are most preferred to meet long-term aspirations and short-term emergencies. These loans require no collateral requirement, have attractive interest rates, come with easy repayment terms, and are very simple to avail. Today, you can avail a loan in a few minutes with a loan app.
With increased ease and improved availability, many people are opting for personal loans without having the proper knowledge to manage them. This has led many people into a poor debt management or into a debt trap.
Read on to discover the most common mistakes that you must avoid before taking out a personal loan.
Common mistakes to avoid while taking a personal loan
When making financial decisions, it is very crucial to have the right financial knowledge. This will help you make informed decisions and allow you to manage your finances well. Here are some costly errors you should avoid when applying for a personal loan.
- Not comparing the options
Not all personal loans in the market are the same. Thus, it could be risky if you opt for a personal loan without comparing all the options. You can visit different lender’s websites or download a loan app to compare the loan offers you are eligible for. Note the interest rates, processing fees and other important terms offered by different lenders.
You should also consider pre-approved offers as well as offers given by the loan apps. Even a slight difference in the interest rate can have a significant effect on your repayment burden. Thus, it is very important to choose the right lender that fits your requirements.
- Not Checking your Credit Score
An essential criteria lenders use to determine your creditworthiness is your credit score. You may be given the best personal loan interest rates if have a high credit score. But a poor credit score can result in higher EMIs or even rejection of your loan application. Thus, before applying for a personal loan, you must check your credit score.
In case, your credit score is poor you can take the necessary steps to improve your credit score. Paying off your existing debts, closing some of the loan accounts, maintaining regular EMI payments, and maintaining your credit card utilization below 30% can help you improve your credit score. Note that it might take 3 to 6 months to reflect a change in your credit score.
- Not Reading the Fine Print of the Loan
Personal loans come with a variety of terms and conditions. For instance, some lenders may impose a steep penalty on prepayments to close your loan sooner, but others may not. Thus, reading the loan agreement’s fine print before signing may ensure that you are aware of all the applicable terms and conditions.
In addition to the pre-payment conditions, you should also check the options for loan transfer, loan top-up, loan pre-closure and more. You should also make sure that your lender has a strong customer-support report and that they are prompt at resolving your queries. Reading reviews about the lender online can help you choose the right lender.
- Over-borrowing
This is another very common mistake that people make. Borrowing more than you need can increase your loan burden and result in hefty interest payments. Thus, it is very important to estimate the amount that you would need to fulfil your urgent financial needs. Stick to the budget and do not borrow more than you need at the moment.
Remember, a loan is a financial liability and you have to pay interest on every penny you borrow. Thus, keeping your loan amount low will help you save on the interest as well. So, even if you qualify for a higher value, stick to the amount that you need.
- Missing out on EMIs
This is another very common mistake that people make. Not making your EMI payments on the scheduled date not only imposes a penalty and increases your loan repayment burden, but it also impacts your credit score negatively.
To avoid this you can opt for an auto-debit facility and maintain a sufficient balance in your account. You can also avail a loan through a loan app, as they send constant reminders and notifications reminding you of the payment. This too will prevent you from the negative effect of missed EMI payments.
Final Thoughts
A personal loan is one of the most dependable ways to get money in times of need. It is not only easily accessible and simple to apply, but it is also highly affordable. But you must know the details regarding a personal loan to make the right choices.
In addition to the above-mentioned points, make sure to ask your lender about the type of interest levied on the loan. Read the reviews online and always go for a reputed lender with good customer support.