Personal loans are easy to obtain and can be useful in times of financial need. These loans are easier and faster to obtain than any other type of loan to help you get by in an emergency. You can get a personal loan without recourse to any collateral. However, while considering a personal loan, it is prudent to avoid some major mistakes:
Here are 5 mistakes to avoid when taking out a personal loan
Â· Borrow a loan beyond your repayment capacity: A smart rule of thumb when borrowing a loan is to live within your means. The body of the loan must be such that you can return on time. A rule of thumb is that personal loan IMEs should not exceed 10 percent of your net monthly income.
Â· Don’t compare lenders: If you get a personal loan, make sure you get the most acceptable deal available in the market. After all, borrowing money always comes at a cost, and the lower your total loan cost, the easier it will be to get out of debt.
Â· Applying For Too Much Personal Loans: It is a misstep when you want funds for your immediate needs. In a desperate situation where you need instant cash, you might tend to apply for a personal loan from too many lenders. The lender does a thorough investigation while processing your loan application, which will appear on your credit report. If there are too many serious inquiries, your credit score can suffer.
Â· Don’t read the fine print: Check the fine print on the personal loan you are considering taking out. Make sure you are aware of any hidden expenses. Some lenders, for example, impose prepayment penalties. This means that if you wanted to prepay your loan, you would end up paying more than for a similar loan with no prepayment charges.
Â· Do not balance your tenure with EMIs: You can reduce your EMI by taking out a longer term loan. While this can lower your monthly repayment and lessen your financial strain, remember to do this only if you are having real difficulty repaying the loan, and not just because you can.
A personal loan can give you the much-needed financial relief if used wisely. Hence, understand all about the personal loan process to avoid pitfalls. The key to remember is to plan, prepare, and consider your options with a clear mind so that you can prepare for financial success.
(Expert comments from Vivek Veda, co-founder and CFO, KreditBee and co-founder, FACE – Fintech Association for Consumer Empowerment)