A personal loan is granted for various purposes- for medical emergencies, for family (education, marriage, vacation), and for household purposes (extension, renovation, purchase of refrigerator, computer, air conditioner etc.). People prefer to take personal loans because of its easy availability, approval as well as various flexible options that come with it. In a nutshell, if used properly, it can be a very good instrument for managing your personal finance.
Personal loans, however, can become one of the costliest forms of debt in case we fail to keep in mind or follow some key aspects.
The following is a guideline to help you avoid the 6 deadliest mistakes people make while taking a personal loan.
- Taking a Personal Loan Beyond Your Repayment Capacity
Even before you apply for a personal loan, it is necessary to carefully evaluate your ability of how much EMI you can pay on a regular basis. The thumb rule is that the EMI component of a personal loan should never exceed 10 to 15 percent of your monthly income. This rule will allow you to pay your monthly EMIs smoothly without stretching your budget.
- Selecting Low EMIs for a Longer Tenure
It looks like an easy repayment option to choose the low EMIs for a longer tenure. However, it is more advisable to opt for an aggressive approach like short term loans with higher EMIs. Short term loans are more cost effective because it allows the lower absolute payout requirements. It is best for those who want to repay their debts as fast as possible. However, always consider your monthly budget and repayment capacity while deciding on the tenure of your loans.
- Taking Loan Without Reading or Understanding the Terms and Conditions Completely
One of the most important things to keep in mind while applying for a personal loan is to read the fine prints thoroughly. It is necessary to understand the various terms and conditions of a personal loan before you sign any agreement with your personal loan provider. In case you regret your decision later, it may be quite expensive to mend your mistake. Generally, part payments or pre-mature closure of loans are not granted unless you are forced to pay a penalty or a pre-payment amount to the loan bank. So, always make sure to clarify all your queries and doubts while taking a personal loan.
- Lack of Research of Loan Options
Even if you have a trusted financial advisor to guide you, it is always important to do some research on your own to understand the pros and cons of a particular financial product. So, while taking a loan, you should thoroughly scan and compare the key features including loan tenures, interest rates, prepayment charges, and other terms and conditions. Never make your decisions depending on teaser offers that are received via emails or SMS as you will not be able to read the fine prints in them. You can also visit an aggregator’s website to compare the key features of various loan options.
- Applying for Multiple Personal Loans
At the time of loan application, the lender will always ask for a copy of your credit report from the Credit Information Bureau, CIBIL. One of the most important things that a credit report shows is the date(s) on which lenders made their checks. If your Credit report shows more than one loan eligibility checks close to one another, you will be considered as a borrower with too many expenses. This will lower the chances of a successful loan application. Even if your loan is sanctioned, the interest rate would be much higher than what you should be paying. So, it is always safe to avoid multiple loan applications simultaneously or within a short span.
- Failing to Disclose the Details of Already Existing Loans
While applying for a new personal loan, you should always disclose and share the details of all your existing loans. Failing to disclose such important details may badly affect your personal finance. Hiding such details may get you a higher loan amount sanctioned, but when you will start paying off, it will ultimately end up stretching your monthly budget.
There are various pros and cons of taking a personal loan. Most financial advisors will discourage you from taking a personal loan as it often ends up being a burden that you cannot shed for years. However, if you are in an urgent need of cash, and you have no asset that you can sell or keep as a mortgage, it is always advisable to take a personal loan. That is because in such cases, a personal loan will be less expensive than withdrawing money using a credit card. Though having a personal loan may seem like a burden for a few years, if applied properly and paid off timely, it can help you manage your personal finance in a much easier way.