Personal loan is usually preferred credit option for those in need of quick finance, given that it comes with fast disbursal, minimum paperwork and no collaterals. The best part is that personal loan does not have any end usage restriction. However, this ease of availing personal loans often leads borrowers to undermine crucial aspects while availing it. A misstep can cost higher interest payout or other charges and can even land you in a debt trap.
Here are some common mistakes that personal loan applicants often make before or during the loan application:
Not fetching your credit report: As soon as you apply for a personal loan, lenders fetch your credit report to evaluate your creditworthiness. Some lenders have also started to factor credit scores for setting interest rates for their borrower. Applicants with higher credit score get loans sanctioned at lower interest rates and charges.
Hence, ensure to fetch your credit report as any error in it can reduce your credit score and thereby, your loan eligibility. Report the errors, if any, to the concerned bureau and lender for rectification. A rectified credit report will increase your credit score, and thereby your loan eligibility with better rates and other terms and conditions. Prior fetching of your credit report can also get you pre-approved loan offers available on your credit score.
Applying directly with multiple lenders: Credit bureaus list your loan applications in the enquiry section of your credit report. Direct loan applications with the lenders are considered as hard enquiries and can reduce your credit score by a few points. Thus, applying for personal loans with too many lenders within a short span can drastically reduce your credit score. Instead, visit online lending marketplace to find out various personal loan options available on the basis of your credit score, income and other eligibility parameters.
While these marketplaces will also fetch your credit report from the bureaus, such retrievals are considered as soft enquiries and do not impact your credit score.
Ignoring your repayment capacity: Optimum personal loan EMI would be the one that leads to lowest interest cost without adversely impacting your monthly mandatory expenses, existing EMIs and contributions to your financial goals. Opting for an EMI without considering your optimum repayment capacity would either land you with an aggressive EMI schedule or a long tenure costing higher interest payout. Remember that an aggressive EMI schedule can negatively impact your savings and financial goals and even lead to EMI defaults during unforeseen financial exigencies. Not comparing personal loan options offered by various lenders: Personal loan segment is a highly competitive one served by almost all banks & numerous NBFCs. Interest rates and various charges for the same loan amount, tenure and credit score can vary widely across various lenders. A proper comparison across various lenders can save a lot, in terms of charges and interest cost. Hence, visit online lending marketplaces to compare interest rate, processing fee, prepayment charges and other terms & conditions offered by various lenders before selecting a particular lender. Ignoring alternative loan options: Secured loan options such as top-up home loans, loan against securities, loan against property and loan against FDs, do not have any end-usage restrictions. These loans usually come with lower interest rates and longer tenure than personal loans. For example, existing home loan borrowers can opt for top-up home loans whose interest rates usually start from around 8.75 percent p.a. onwards with tenures of up to 30 years depending on the residual loan tenure. Similarly, those having sizeable long-term investments can consider loan against securities for financing their financial shortfalls at lower interest rates and for longer tenures without selling their securities. Taking loan for recreation or buying luxury items: Being unsecured loans, personal loans come with high interest rates, ranging from 11–24 percent p.a. depending on the applicant’s credit score, loan amount, tenure, job profile, etc. While loan applicants are always free to use the personal loan proceeds as they wish, using it for financing luxury items or recreational activities should be best avoided due to their high cost. Instead, adopt financial planning strategies beforehand and invest regularly through mutual fund SIPs for such goals. Take the help of online SIP calculators to find out the monthly contribution required for realising your short-term financial goals.
Avail personal loans only for dealing with unforeseen exigencies or meeting shortfalls in unavoidable life goals at short notice.Gaurav Aggarwal – Associate Director and Head of Unsecured Loans, Paisabazaar.com