Top 10 Mistakes You Should Avoid When Taking a Personal Loan

Top 10 Mistakes You Should Avoid When Taking a Personal Loan

Keeping aside some funds for times of financial emergencies is one of the integral components of financial planning. It is a known fact that unexpected expenses can come up at any time without any warning. No matter how much you try to avoid such situations, the reality is- it is impossible to guarantee that financial stress would never occur in your life! These expenses could be related to medical treatment, higher education, or paying off a contingent liability. If you end up dipping into your savings to handle these expenses, it can leave you vulnerable for the future. Therefore, you must look for an option that offers you the financial flexibility to meet your liabilities without derailing your financial future.

Borrowing from friends and family can not be an option as in the present times. They might also be struggling to stay afloat. The best option that you must consider in such a situation is taking a Personal Loan. More and more individuals are opting for Personal Loans to take care of paucity of funds. This has led to many financial institutions offering unsecured Personal Loans at attractive interest rates and flexible repayments. Some of the most popular Personal Loan offerings in the market at present are SBI Personal Loan, HDFC Personal Loan, IDBI Bank Personal Loan, and ICICI Bank Personal Loan amongst several others.

What is a Personal Loan?

A Personal Loan is an unsecured loan offered by financial institutions to individual borrowers for their urgent financial requirements. The borrower can use the amount availed as a Personal Loan for any personal or professional requirement. The maximum amount available as a Personal Loan can go up to Rs. 25 Lakh with the interest rates starting from 11.99% onwards. The maximum repayment tenor available against a Personal Loan is 60 months. Moreover, there is no need to make any lump-sum payments as the repayments are to be made in easy EMIs. Most Personal Loans such as Syndicate Bank Personal Loan are available for salaried as well as self-employed applicants. With the various benefits on offer, it is not surprising that Personal Loans have become extremely popular with borrowers.

10 mistakes to avoid while taking a Personal Loan

While it is true that Personal Loans allow you to address your financial urgency in an efficient manner, there are some precautions that you should observe. A Personal Loan is a form of borrowing and comes with an interest cost, so any callousness on your part can have a significant impact on your financial future.

Here are some mistakes that you must avoid while taking a Personal Loan: –

  1. Availing the maximum amount: Just because you are eligible for a higher amount, it does not mean that you should go for it. You must remember that Personal Loan comes with an interest cost which could strain your finances. You must opt for an amount which will meet your requirements. If the amount availed as a Personal Loan lies unused in your bank account, you will be bearing interest cost for no reason.
  2. Not checking your CIBIL score: You must check your CIBIL score before applying for Personal Loan as your application has fewer chances of being approved if your CIBIL score is below 700. You should apply for a Personal Loan only if your CIBIL score is higher than 700. Otherwise, you must first focus on improving your CIBIL score.
  3. Applying for too many personal loans: Not only does applying for multiple Personal Loans shows your desperation for credit but also reduces your CIBIL score as multiple hard inquiries are recorded in your credit report. On top of that, you will end up paying processing fees against multiple loan applications. Make it a point to never apply for multiple Personal Loans simultaneously.
  4. Opting for longer repayment tenor: You must opt for a repayment tenor that offers you an EMI amount which you can easily afford. The payment structure should be such that you can repay the loan in the shortest possible time. Unnecessarily opting for the maximum repayment tenor will increase your interest cost and you will be serving the EMIs for a longer duration.
  5. Borrowing for unnecessary expenses: You must not take a Personal Loan just because it is available to you. There must be a specific purpose for availing the loan, and that purpose must lead to a productive outcome. Splurging on unnecessary stuff just because you can get a Personal Loan is not right.
  6. Not reading the fine print: You should not sign the loan agreement without reading the terms and conditions specified therein. Even if it takes a day or two, make it a point to read the entire loan documents carefully before signing against the dotted line.
  7. Not negotiating with the lender: Do not finalize a Personal Loan offering without negotiating with the lender regarding key aspects such as interest rate, repayment tenor, pre-payment charges, etc. All lenders want customers with a good credit score, and if you have a good score, you can get your way with the lender on certain things.
  8. Not researching: Never accept the first loan offer you get. The market for Personal Loans is very competitive, with multiple lenders vying for customer attention. By doing some research and exploring multiple loan offerings, you can get a better deal for your Personal Loan requirement.
  9. Do not borrow to invest: Never avail a Personal Loan to invest money in a certain investment avenue. Personal Loans are unsecured offering and come with a high rate of interest. Virtually no investment opportunity can offer you returns higher than the interest cost of a Personal Loan.
  10. Not considering current liabilities: You must not ignore your current financial commitments while taking a Personal Loan. Make sure that the total EMI expense does not exceed 40% of your monthly salary; otherwise, you are in for a tough time.

Availing a Personal Loan could be an excellent decision in times of financial crunch, but you can realise its full benefit only when you avoid the mistakes mentioned above while taking a loan.

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