Nowadays, availing personal loans has become convenient because of the completely paperless online applications, pre-approvals, and excellent offers on interest rates. However, you need to be very cautious when applying for a personal loan. If you do not do the due diligence, then rather than solving a financial crisis, the personal loan may create a new one.
Here are the top 5 mistakes that you must avoid when applying for a personal loan.
Not checking your repayment capacity
Many personal loan applicants make the mistake of availing the maximum loan amount they’re eligible for. This mistake can cost you dearly since you’re borrowing a loan amount that may be much higher than you actually require. This will eventually lead to much higher EMIs that you may be unable to repay.
Instead, you should go the other way round. Prepare a budget and calculate exactly how much funds you need from the personal loan. Even if you’re entitled to more, refrain from doing that.
To calculate how much your EMI should be, deduct your monthly expenses from your total monthly income and find out how much money you have left as a surplus. If your EMI is less than this amount, then it won’t be a burden on your finances.
Not Reading the Fine Print
When a lender provides a loan offer to you, make sure you read the agreement thoroughly and carefully. If you do not understand anything, then feel free to ask the representative what exactly it means.
The loan document contains details of all charges like processing fees, foreclosure charges, loan interest rates, etc. Make a note of the charges and read all clauses carefully to avoid problems later.
Not Considering Alternative Lenders
Because of the abundance of lenders providing personal loans, you are bound to get multiple excellent personal loan offers if you just look at alternative lenders rather than simply accepting the first offer. Low-interest personal loans are all the rage, and you may get a better deal if you consider other options.
Comparing offers from different lenders also gives you a look at the other costs that the competition is charging. Processing fees and foreclosure charges may also vary among different lenders. Hence, it is a good idea to assess different loan offers before accepting one.
Hiding Existing Loan Details
Lenders always perform a thorough evaluation of all your past loans and repayment history. Any existing loans you have are already on record, and their details are pulled out when your credit report is created.
Hiding details of your existing loans can put a spanner in the works as far as your personal loan application is concerned. Lenders become wary and doubt your repayment capacity. Thus, they might reject your loan or charge higher interest rates.
Taking a Personal Loan as a Spontaneous Decision
Since a personal loan is a quick and easy way to borrow funds, it can give you a false sense of security as far as your finances are concerned. At the end of the day, a personal loan is another loan and a liability.
Thus, if you’re thinking of taking a personal loan to fulfil your wants rather than your needs, then you may need to think again and give your decision due consideration. It is easy to fall into a financial trap if you get a personal loan just because you needed to buy an expensive gadget or a luxury car.
On the other hand, if you’re indeed short of funds and want to fulfil an emergency expense, then your decision to apply for a personal loan may be the right decision.
Because of the ease of availability of a personal loan, you can easily fall into the pitfall of overlooking basic details and making a decision too soon. Thus, leading to the above mistakes. Ensure you keep the above points in mind when applying for a personal loan and make an informed decision.