Personal loans are often the preferred financial instrument to finance people who need funding, either to achieve their personal goals or to take care of an emergency. For a personal loan, there is no need to promise any collateral. Competitive interest rates, flexible repayment periods and the possibility of immediate loan processing and disbursement are some of the reasons for its popularity.
However, you must make sound financial decisions when it comes to applying for any type of loan to avoid any unpleasant surprises later. When a financial crisis arises, personal loans are a popular way to take care of it. The interest rate for a personal loan could be higher than for other loan products, and a good credit score is important to get a personal loan at a lower interest rate.
We have put together 5 costly mistakes to avoid while applying for a personal loan. By knowing all of them, you can get the personal loan best suited for you.
1. Not comparing the options
Personal loans available in the market may be different in terms of interest rates, charges, fees, service quality, etc. Thus, not comparing products from different lenders can be dangerous. You can easily compare options in the online marketplace according to your suitability and needs. Effective interest rate, processing fee, pre-payment charges, eligibility requirements, digital loan processing facility, etc. may be a few terms of comparison.
It is wise to compare your credit options before submitting your loan application form. Don't get carried away by loan offers that promise you the lowest rate of interest. It is recommended that you carefully also consider all the other factors and make an informed decision.
2. Not checking your credit score before applying for a personal loan
Checking your credit score is very important because lenders first check your score to check your creditworthiness. If you do not have a good credit score, there is a chance of rejection or high-interest rates. You can improve your credit score and get a personal loan at a good price.
Your credit rating is one of the most important ways to check your creditworthiness with creditors. If your score is more than 750, you may be offered the lowest available interest rates on personal loans among other benefits. However, if it is less than 750, your effective interest rate may be much higher which translate to higher EMI and even rejection in some cases.
Therefore, you should check your credit score before applying for a personal loan so that you can enjoy the interest rates. If it is not up to the mark, you should first take corrective measures such as clearing out any outstanding credit card balances to improve your score.
3. Not reading the loan fine print
Different lenders have different terms and conditions for personal loans. For example, the lender may charge a prepayment fee to close the loan sooner while others may not charge any fees. Reading the terms of the loan agreement before registration can help you to get a full account of all the terms and conditions.
Lenders may assure you many offers and benefits at the time of application. Read the fine print and be informed about all charges. If the terms do not match your ability to pay, you should go in for another lender with terms suiting your abilities and requirements.
4. Failure to consider your budget
While applying for a loan may seem like an easy way to manage finances, you should also consider the accumulation of debt and outstanding payments. It is never advised to go deeper into debt as it affects your personal, social, mental, and financial health. Always manage your financial opportunities with commitment and exercise due diligence. Make sure you do not borrow more than your repayment ability. Strictly speaking, the amount of the loan should not be more than 15-25% of your monthly income.
Interest rates on personal loans can vary from lender to lender and are in a wide range. Therefore, it is very important to check the feasibility of EMI repayment for your personal loan according to the interest rate that applies to you, especially if you have other loan payments that you need to take care of. Ideally, all your monthly payments should not exceed 40% of your monthly income.
Different lenders have different eligibility criteria such as salary, age, job, good credit score, etc. Applying for a loan after assessing your eligibility can help you improve your eligibility and get a better loan.
5. Not making timely payments
It is important to repay the loan on time for many reasons. Every time you miss out on an EMI, it reflects poorly on your credit score. This can easily affect your chances of getting a future loan. It is recommended that you ensure complete financial management and manage your credit needs properly. Make sure you repay your loan on time by setting a reminder on your phone or by making sure you pay automatically so you don't have to worry about payment dates.
A personal loan is the best solution for any financial requirement.
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