When a financial emergency arises, many people turn to a personal loan for financial assistance. The simple online procedures and pre-approved offers make it easier to apply for personal loans. However, to avoid significant financial difficulties, it is essential that you exercise caution while applying for a personal loan.
But did you know in the financial year 2021, the delinquency levels in personal loans rose to 12.7%? This number was comparatively much lower at 8.2% and just 4% in the years 2020 and 2019, respectively.
Lack of knowledge and carelessness when applying for a personal loan might trap you in a financial crisis that could have a negative impact on your family's future and your own. You can advance swiftly in life by learning from other people's mistakes. Here, we have compiled for you some of the most common mistakes to avoid before applying for a personal loan.
Your credit score plays a major role in deciding your creditworthiness. Since no collateral is required against personal loans, lenders check your credit score to know your ability to repay the loan. A high credit score helps you to secure a higher personal loan amount, better repayment terms and also offers favourable conditions. Therefore, before opting for a loan, it is always better to check your credit score.
Tip: If your CIBIL is not 750 or above, it is best recommended that you first work towards building it.
A query is raised each time you apply for a loan from a lender, and it shows up on your credit report with the date. Your credit score decreases with every inquiry. You are deemed to be "credit hungry" when many inquiries are made in a short period of time. This lowers your chances of the banks going through your application. Another possibility is that you may be charged a higher interest rate.
Tip: Avoid giving your lenders the impression of being credit hungry. Make a smart budget and stick to it.
Many people often choose personal loans based on recommendations or instant approval. Though taking this into consideration is not a bad idea, failing to shop around could result in you missing out on the greatest deals. Instant approval personal loans may have a higher interest rate than loans from other lenders. It can take more time, but it could significantly lessen your debt load.
Tip: Before filling out your loan application, it is vital that you explore all possible options. Compare lenders and choose the one that offers the best deal.
Not checking the fine print of a loan document is probably the worst mistake of all. When you apply, the lenders might guarantee quick approval and a large loan amount. Avoid being duped by such claims. Ensure you carefully read the terms and conditions and know any upfront fees. Make the best loan decision if the terms don't fit your ability to repay them.
Tip: Fees and charges are levied by all lenders, however, it is prudent to have an eagle’s eye on such costs and expenses. Take the help of a professional if you feel you cannot understand certain terms or clauses.
You may choose to pick a loan with longer tenure in order to pay lower EMIs. But doing so might just make matters worse in terms of debt. The interest rate will increase as the tenure lengthens. Smaller loan terms allow you to save more money on interest and overall debt.
Tip: A smaller EMI is surely tempting, but do not fall for it. Unless budget is a concern, make sure you choose the smallest repayment tenure. You’ll be surprised to see how much you can save!
It is best to take out a personal loan when you have serious financial difficulties. Taking a loan for fun activities like planning a trip or gambling can cost you later.
Tip: Only because getting a loan is easy doesn’t mean you take it. Make sure you have solid reasons and are in real need of money.
A personal loan can assist you in avoiding a financial crisis, but then again, it can also put you in one. Check your ability to repay the loan before applying for a specific loan amount. Don't take on more debt than you can afford.
Tip: Getting your personal loan rejected can be traumatic. Best avoid such a situation by checking out the eligibility criteria beforehand and apply only when you are ready.
A personal loan is a financial commitment that you make to a credit bureau. You must carefully handle your debt, whether it comes from a personal loan or a credit card loan, to prevent any future inconvenience. Taking precautions can help you avoid the problems mentioned above. Since taking prevention can keep you out of trouble and help you reap the benefits to the fullest, it is always preferred to do your research in advance.