Applying for a personal loan to finance your needs is a good idea, but if not handled carefully, these loans can land you in a debt trap from where it may be difficult to resurface. Following are some common mistakes that borrowers make when they apply for personal loans:
– Borrowing more money than what you can afford
It’s very easy to get tempted while you are borrowing money. Technology has advanced to a level where you can apply for online personal loans through your smartphone or any gadget with an access to the internet, but don’t commit the mistake of borrowing more than what you require. Borrowing more will result in difficulty of repayment and you need to avoid that at any cost. Instead, utilize the online calculators provided on your bank’s website that churns out the exact amount you require, no more and no less. You should understand that a loan will definitely assist you, but with a high personal loan rate of interest, things can get complicated, especially when you have a lot to repay.
– Taking a loan without reading the documents
When was the last time you read the complete ‘Terms and Conditions’ document of any service? Hard to recall right? Well, if you’re signing the documents of your personal loan without going through them, then you are inviting trouble. It’s simple, you’re obliged to obey all the terms and conditions listed in a legal document if you’ve signed them, so to avoid this from happening, give it a read, it will only consume fifteen minutes of your time. Ensure that you’ve read and understood the loan’s terms and conditions including pre-closure charges, pre-payment charges, and interest rates etc. Remember, ‘Haste makes waste’, so don’t hurry through it.
– Opting for longer term
The lender might propose a longer term for the personal loan, but it is not compulsory to accept it. Numerous banks and financial entities provide a personal loan with a maximum tenure of 7 years. Opting for a longer term may feel as the best option in the beginning, but with higher interest rates applicable, the repayable amount for the loan will also go higher. The EMI on a longer term will be low, but at the end of the loan period, you would’ve paid a lot more compared to a shorter term. So, it is important that you choose a short-term period instead of opting for a longer tenure.
– Taking a loan without doing a market survey
A little research hurt no one, be it for a personal loan or any day-to-day product. Comparing and verifying other options always come handy. Before finalizing a lender or a bank, it is vital to know what other banks are offering. Take some time out and do a comparison of the interest rates, charges and prepayment clauses offered by different lenders and banks. Remember, you can always negotiate on the documentation and application processing charges.
– Not maintaining records
It’s paramount to maintain the records of disbursed loans and payments you have made. It is vital that you maintain a record of processing fees, negotiated interest rates, and waivers. This should be done as the banks, at times, charge for the agreement copies and additional statements.
– Not checking your credit report
Almost all of the lenders take your credit score into consideration before giving an approval for the personal loan or deciding interest rates. Ensure that you have checked your credit report and corrected all the faults prior to applying for the loan.
– Not disclosing your existing debts
Several borrowers have a tendency to downplay their existing debt repayments on purpose in order to have a higher loan amount. Most of the times this strategy backfires as your bank will cross check your credit report and it will reveal all of your pending debts. If the lender is not the forgiving kind, he can also reject your application. So tread carefully and disclose all of your existing debts to the lender before applying for a loan.
So, try avoiding these aforementioned common mistakes and make the most of your personal loan.