Personal loans are often the preferred financing facility for cash strapped people, not only to meet their life goals, but also to bail them out in an emergency. No obligation to pledge any collateral, competitive interest rates, repayment terms of up to five or seven years, and the possibility of rapid loan processing and disbursement are some of the reasons of its popularity.
However, it is important that you make informed financial decisions when applying for any type of loan in order to avoid any unpleasant surprises afterwards. To help you with that, here are some costly mistakes to avoid when taking out a personal loan.
1. Don’t compare options
All personal loans available in the market may not be the same in terms of associated costs and other aspects. As such, not comparing loan products could be risky. You can easily compare options in an online marketplace based on your eligibility and requirements. You should also not ignore the pre-approved offers offered by your bank and the online marketplace of your choice for faster loan disbursements. The applicable interest rate, maximum loan amount, processing fees, tenure options, eligibility conditions, ease of processing digital loans, etc. could be some benchmarks.
When it comes to interest rates, here are the lowest personal loan interest rates currently offered by some of the country’s leading banks. Note that the interest rate that is applicable to you could be higher depending on your age, your income, your profession, your credit rating, the amount of the loan or any other condition of the lender you have chosen. .
Data compiled by BankBazaar on July 1, 2021. * HDFC Bank rack interest rate.
2. Don’t Check Your Credit Score Before Applying For A Personal Loan
Your credit score is one of the main ways lenders assess your creditworthiness. If your score is above 750-800, you can avail of the lowest interest rates available on personal loans, among other benefits. However, if it is well below 750, your applicable interest rate will likely be much higher than the lowest available rates, resulting at best in higher IMEs and at worst in rejection of the application. . As such, you must check your credit score before applying for a personal loan to be able to take advantage of the best loan repayment terms. If it’s not up to par, you need to take corrective action first, such as wiping out any overdue credit cards to improve your credit score. Note that it is also advisable to compare your options, but only apply for the offer that best meets your needs, as each request could lead to a serious investigation that could lower your credit score.
3. Don’t read the fine print of the loan
Different lenders have different terms on personal loans. For example, one lender may impose a hefty prepayment penalty to close your loan early, while others may not charge a fee. Reading the fine print of the loan agreement before signing can therefore help you achieve complete clarity on all associated terms and conditions.
You may be eligible for a large loan amount when your actual financing need is much smaller. However, you should only borrow an amount that would meet your needs, not a dime more. Excessive borrowing could put unnecessary strain on your finances, preventing you from paying your contributions in full on time. Any laxity in loan repayments would result in additional penalties and also hurt your credit score, compromising your borrowing capacity and future loan needs.
5. Failing to assess the affordability of the new loan
Personal loan interest rates can vary from lender to lender (as shown in the table above) and can range from 8.9% to 24% per year or even more. As such, it is extremely important to assess the affordability of your personal loan IME based on the interest rate that is applicable to you, especially if you also have other loan repayments to deal with. Ideally, all of your debt repayments in a month should not exceed 40% of your monthly household income.
If the new loan IMEs brought your total debt above this bar, you should check to see if you could get a lower interest rate from another lender, reduce your loan amount, or go for a term. longer to keep repayment obligations under control. If the best available interest rates are high due to your low credit rating, you can also explore secured loans like gold loans, loans against property or mutual funds etc. depending on the feasibility instead of an unsecured loan.
(The author is CEO, BankBazaar.com)