5 costly mistakes to avoid while taking a personal loan
Personal loans are often the preferred financing facility for cash-strapped individuals not just to fulfil their life goals but also to bail them out during an emergency. No requirement to pledge any collateral, competitive interest rates, repayment tenures up to five or seven years and the possibility of quick loan processing and disbursal are some of the reasons behind its popularity.
However, it’s important you make informed financial decisions when it comes to applying for any type of loan to avoid any unpleasant surprises later on. In a bid to help you in this regard, here are a few costly mistakes you should avoid while taking a personal loan.
1. Not comparing the options
All personal loans available in the market may not be the same in terms of the associated costs and other aspects. As such, not comparing the loan products could be risky. You can easily compare the options in an online marketplace as per your eligibility and requirements. You should also not ignore the pre-approved offers extended by your bank and your chosen online marketplace for faster loan disbursals. Applicable interest rate, maximum loan quantum, processing fee, tenure options, eligibility requirements, digital loan processing facility, etc. could be a few criteria for comparison.
As far as interest rates are concerned, here are the lowest personal loan interest rates currently being offered by some of the leading banks in the country. Do note, the interest rate applicable to you could be higher depending on your age, income, profession, credit score, loan quantum or any other terms and conditions of your chosen lender.
Data compiled by BankBazaar on July 1, 2021. *HDFC Bank’s rack interest rate.
2. Not checking your credit score before applying for a personal loan
Your credit score is one of the key ways to assess your creditworthiness by the lenders. If your score is above 750-800, you can be offered the lowest available interest rates on personal loans among other benefits. However, if it’s way lower than 750, your applicable interest rate is likely to be much higher than the lowest available rates translating to higher EMIs at best and rejection of application at worst. As such, you must check your credit score before applying for a personal loan to be able to enjoy the best loan repayment terms. If it’s not up to the mark, you should first take corrective measures like clearing any outstanding credit card dues to improve your credit score. Do note, it’s also advisable to compare your options but only apply for the offer that best meets your requirements as every application could lead to a hard enquiry that could reduce your credit score.
3. Not reading the loan fine print
Different lenders have different terms and conditions on personal loans. For example, a lender may charge a hefty penalty on prepayments to close your loan sooner whereas others may not levy any charges. Reading the fine print of the loan agreement before signing up can, thus, help you in getting complete clarity about all the associated terms and conditions.
You might be eligible for a big loan ticket size when your actual financing requirement is much smaller. However, you must borrow only an amount that would meet your requirement and not a penny more. Over-borrowing could exert unnecessary strain on your finances, making it difficult for you to clear your dues in full on time. Any laxity in loan repayments would involve additional penalties and also hurt your credit score jeopardising your borrowing capacity and future loan requirements.
5. Not evaluating the affordability of the new loan
Personal loan interest rates may vary from lender to lender (as indicated in the table above) and could range anywhere between 8.9% and 24% p.a. or even more. As such, it’s extremely important to evaluate the affordability of your personal loan EMIs according to the interest rate applicable to you, especially if you also have other loan repayments to take care of. Ideally, all your debt repayments in a month put together shouldn’t exceed 40% of your monthly household income.
If the new loan EMIs would take your total debt obligations above this mark, you should check whether you could get a lower interest rate from another lender, lower your loan amount or go for a longer tenure to keep the repayment obligations under control. If the best available interest rates are high because of your low credit score, you can also explore secured loans like gold loans, loans against property or mutual funds, etc. based on feasibility instead of an unsecured loan.