Loans provide financial assistance, from necessities like medical expenses to buying a home to planning a vacation or luxuries like buying an expensive smartphone. We avail of loans for a variety of reasons. People usually hesitate to ask their family, friends, and relatives for monetary help as they feel that taking a loan is the best option. Although most of us are familiar with the loan application process, there could be some initial apprehension before applying for a new loan. If you are a first-time borrower or have already faced loan rejection, applying for a loan can be even more stressful. The main reason why many people are afraid to apply for a new loan is that they are afraid of the loan application getting rejected.
Banks in India offer a wide variety of loan products such as home loans, car loans, and two-wheeler loans, and in recent times some also offer medical loans and consumer electronics loans. In many cases, your loan requirement may not fall into any of these categories.
A personal loan is a comprehensive type of loan that you can take for any requirement that cannot be met by any specific category. The biggest advantage of this personal loan is the flexibility it offers along with a pre-decided interest rate. The interest rate may be high as it is an unsecured loan, but at the same time, it allows you to predict and plan your future budget. This is because your loan instalment per month will remain the same even as your income increases. Another important factor is, that most banks offer personal loans for a short period with tenures ranging from 12 to 60 months.
What is a personal loan?
A personal loan is an unsecured loan product for banks. This means you do not have to keep anything as collateral while taking the loan. As a result, banks and lenders are extra cautious about these loans. Even a small mistake on your part can lead to the rejection of the loan application. Let us discuss 5 common mistakes to avoid while applying for personal loans and find out how we can avoid them.
1. Applying for a loan without doing thorough research:
When applying for a loan, you must do thorough research as loans are usually long-term commitments. Doing thorough research before applying for a loan will save you from financial problems in the future. Most people generally do not check and compare the various available loan options and directly apply for the loan advised by their lender. For example, if you are planning to renovate your home, instead of opting for a personal loan, you should consider a home renovation loan as it usually carries a lower interest rate than a personal loan. However, if a lender is offering a better deal on a personal loan than a home renovation loan, availing of a personal loan makes sense. A comparison of different types of loans will help you choose the right type of loan for you.
Once you have finalized the type of loan suitable for you, it is advisable to compare the interest rates of various banks and Non-Banking Financial Companies (NBFCs). A small difference in interest rate can make a substantial difference in total loan expenditure. The low interest rate will help you make a wise decision to take a loan. Also, apart from the interest rate, make sure you also compare the processing fee, foreclosure fee, etc.
2. Not Checking Your Credit Score:
The higher the credit score, the lower the interest rate. When you apply for a loan, the bank or NBFC first checks whether you have a sufficient credit score to be eligible for the loan. If your credit score is less than 700-750, your loan application may not be approved. Hence, it is advisable to check your credit score before applying for a loan. It is a good practice to check your credit score from time to time as you will be able to see that there are no errors in it. If you find any mistakes or errors in your credit score, you can get them corrected by the credit bureaus.
Apart from the use of credit score for loan approval or rejection, it is an important factor that determines whether you will get a lower interest rate. Having an excellent credit score means you have a very good loan repayment history, and your profile is less risky for lenders. Therefore, applicants with an excellent credit score are generally offered a lower interest rate than those with an average credit score.
If you do not have a high enough credit score to be eligible for the loan or want to get a loan at a lower interest rate, you should work on improving your credit score. Once the credit score improves, apply for a loan. You can check your credit score directly from the credit bureaus. Many websites provide credit score checks for free. While it is not advisable to check your credit score frequently, you should check it once or twice a year or before applying for a loan to make sure there are no errors.
3. Applying for Multiple Loans in a Short Term:
People often apply for loans with multiple banks and NBFCs to check where they can get the best offer. You harm your credit score when you apply for multiple loans. However, many of these lenders check your credit score with the credit bureaus to assess your creditworthiness. Multiple credit inquiries in a short period may give the impression that you are in a desperate position to avail the loan and it may also call into question your repayment capacity.
Hence, it is advisable not to apply for loans with multiple lenders in a short period as it can hurt your credit score. Instead, you can compare multiple lenders online and choose the one that offers the best deal. While checking your eligibility for an online loan, lenders do a soft credit check, which does not affect your credit score.
4. Not assessing your repayment capacity:
Apart from checking your credit score, banks and NBFCs evaluate your income and repayment capacity to ensure that you repay your loan on time. If your income does not match the loan amount you have applied for, or if you have already borrowed more than your repayment capacity, your loan application may get rejected. Always make sure that you are applying for the loan amount for which you are eligible. If you need a higher amount, it is advisable to wait until you are eligible for it, rather than creating a loan that is difficult to repay.
5. Not Providing Complete Documents:
Many people usually ask the lender for a list of documents required after applying for the loan. However, if you do not have the specific documents that are mandatory to process the loan, your loan application will be rejected. Therefore, it is important to obtain a list of required documents from the representative of the financial institution before applying for the loan and ensure that you have all the documents available with you. It is advised that you submit the required documents immediately as the lender may withhold or reject your application if you delay in submitting the documents. Also, ensure that your details, such as name, date of birth, etc. match with all documents or that you have supporting documents ready.
These are the top 5 common mistakes that people make while applying for a loan, which may result in the loan application being rejected or not getting the best deal. Make sure you choose your loan wisely by comparing the various available options.
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