10 Common Personal Loan Mistakes You Should Avoid
A Personal Loan often proves to be one of the most dependable sources of procuring additional funds. Not only it is readily available for anyone with a decent Credit Score and a regular stream of income but is also processed quickly making it the go-to loan alternative for individuals who are in desperate need of funds.
Despite the easy availability of Personal Loan as a credit product,it is important to know about the top borrowing mistakes. For, it could otherwise turn into a quick and costly mistake.
Mistake 1 – Being Unaware of Your Credit Score
The Eligibility for a Personal Loan largely depends on the Credit Score of the borrower. The higher is your Credit Score, the better is your creditworthiness. That is, the lender will deem you fit for a loan with a high score.
If your score is low, the lender may turn down your application, and, multiple rejections of personal loan applications will lead to a further dent in your score.
Knowing your score before the application, however, empowers you to have a better negotiation power for the terms of the Personal Loan agreement. Hence, it is always better to know your score before applying. With a low score, you can plan the timing application and focus on improving your score first.
Mistake 2 – Not Being Pre-Qualified
When you opt for a Personal Loan, choose your lender beforehand and get in touch with them to ensure that you prequalify for the loan. The lender will then run a soft check on your credit, and see whether or not you fit the bill. While this will not affect your Credit Score, it will help you understand your creditworthiness. In fact, at this point, most lenders give you a sneak-peek into your loan rate and terms. This will help you to be mentally and financially prepared before you officially apply for a Personal Loan.
Hence, make sure not to miss out on this small yet effective step, when you contemplate on taking a Personal Loan.
Mistake 3 – Solely Focussing on the EMI
When you are on the lookout for a Personal Loan, it is obvious that your concentration is directed to the EMI outgo. While your EMI will largely comprise of the Principal Component and the Interest Component, it may also include some other charges that you may or may not be aware of. These include a processing fee (up to 2.5% of the loan amount), late fee, prepayment penalty, etc.
Hence, make sure you are aware of each and every aspect pertaining to your EMI and ensure that you can keep it as low as possible.
Mistake 4 – Using your Personal Loan amount for lavish purchases
Regardless of the ease of availability, a Personal Loan is still a debt which accrues interest and must be repaid in a timely and efficient manner. Hence, if you are Opting for a Personal Loan to purchase expensive gifts, gadgets, or luxury items, or to go for an outlandish vacation, you must think again.
As far as possible, a loan should only be taken for things that are either important or of an urgent nature such as debt consolidation, home renovation, business expansion, or medical emergencies. If not, there must be a repayment plan in place, or you may find it challenging to repay the loan.
Mistake 5 – Blindly Trusting the Salesperson
A Personal Loan entails a substantial financial commitment, ridden with a high-interest rate. While it may be tempting to trust the salesperson and sign the loan agreement without having a hard look at the terms and conditions of the loan, you should avoid this at all costs. You should take out the time to read the fine print of the loan, and if possible, take the help of someone who has a better understanding of finance.
Even if the salesperson seems trustworthy, or is too pushy, do not sign the agreement unless you understand all the terms, and are okay with moving forward.
Mistake 6 – Opting for a High Credit Amount
Depending on your income levels and your Credit Score, you may be eligible to take a substantially high loan amount. This, however, does not imply that you should take a bigger loan than you need. You must understand that a higher loan amount will entail a higher EMI, with an even higher interest outgo.
Hence, before applying for a loan, assess your fund requirement, and only opt for a loan amount that you need. Although it may feel a little restrictive, it will ensure efficient repayment of your EMIs and will prove to be cost-effective in the long run.
Mistake 7 – Not Having a Co-Signer On Board
Of course, not every Personal Loan borrower needs a co-signer. However, if your credit score is low, and you desperately need the loan amount, then you must have a co-signer with a higher score, or better level of income. This can help you qualify for the loan without much fuss. It will also help you in getting the loan at a comparatively lower interest rate.
Mistake 8 – Being Unaware of the Prepayment Penalty
Prepayment of the loan before the date of maturity not only helps you get rid of the financial burden at the earliest possible but also aids in saving the substantial amount of money which otherwise goes towards the interest component of the EMI. However, most lenders levy a prepayment penalty, which can range from 0.5% to a whopping 5% of the outstanding loan amount. To make sure you can prepay the loan as per your convenience, read the fine print of the loan agreement before signing the same, and ensure that the lender levies no or minimal penalty on loan prepayment.
Mistake 9 – Making Late Payments
It is no hidden fact that a late payment on your loan hurts your credit score. Besides, most lenders levy a late fee penalty. Hence, you must avoid this blunder at all costs. A great way to ensure timely payments on your Personal Loan is to opt for an Electronic Clearance Service or to set up some other form of automatic payment.
Mistake 10 – Defaulting on the Loan Payment
This is by far the worst mistake you can make with respect to a Personal Loan. To begin with, the lender may send you a notice regarding the same. If you are still unable to repay the loan amount, the bank may also take the assistance of collection agents, thereby causing some major inconvenience. Of course, a loan default will also be reflected in your credit history and will adversely affect your creditworthiness for a loan time to come, thus making it exceedingly difficult for you to qualify for another loan anytime soon.
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