Personal loans or personal loans are often the most reliable means of meeting the need for additional money. This is not only easily available to individuals with high credit score and regular income, but it is also processed immediately, which is why it becomes a clear loan option for those who are in dire need of money.
Despite the easy availability of a personal loan as a credit product, it is important to know the biggest mistakes that can be made while taking a loan. Otherwise, it can turn into a huge mistake made for you in a hurry.
First mistake – not knowing about your credit score / Being Unaware of Your Credit Score
Your eligibility for a personal loan depends to a large extent on your credit score. The higher the credit score, the higher will be your credit worthiness. That is, having a high score, the lender will easily give you a loan, while having a low score, it is possible that your loan application may be rejected. And on many occasions, your credit score will be reduced further
Knowing your score before applying for a loan will give you the power to negotiate the terms and conditions of the personal loan agreement in a better way. Therefore, it is always better to know your credit score before applying for a loan.
With a low score you can think of improving your score before applying and wait a few days.
Second mistake – not being pre-qualified / Not Being Pre-Qualified
When you think of taking a personal loan, choose your lender in advance and meet them to make sure that you are eligible to get the loan or not. The lender will then do a soft check on your credit and see if you are eligible to take a loan.
Doing so will not affect your credit score, but will help you understand your credit worthiness. In fact, at this point most banks or lenders will give you an estimate of your loan rate and terms.
In this way, you will be able to prepare yourself mentally and financially before officially applying for a loan.
Therefore, make sure that you do not miss out on taking this small but effective step before taking a loan.
Third mistake – focus only on EMI / Solely Focusing on the EMI
How much EMI will have to be paid before taking a personal loan; It is natural to pay attention to this.
While EMI will cover your principal and interest component to a great extent, there may also be some other charges associated with it which you may or may not know about.
This includes processing fee (up to two and a half percent of loan amount), late fee, prepayment penalty, etc.
Therefore, make sure that you know every aspect related to your EMI and try to keep it to a minimum.
The fourth mistake – using personal loans to buy a Shan-o-Shaukat item / Using your Personal Loan amount for lavish purchases
Even though a personal loan is easily available, but in the end it is a loan that you have to repay in a timely and efficient manner with interest.
So, if you are planning to take a personal loan for expensive gifts, gadgets, Shan-o-Shaukat items, or for a fabulous holiday, then you must think once.
As far as possible loans should be taken for those things which are necessary or urgent, such as –
- debt consolidation
- home renovation
- business expansion
- medical emergencies
Otherwise, you must have a repayment plan, otherwise it can be quite difficult for you to fill the loan.
Fifth mistake – blindly trusting the sales person / Blindly Trusting the Salesperson
Taking a personal loan means committing yourself financially with a higher interest rate. However, it can be very tempting to trust and sign a seller without reading the terms and conditions of the loan agreement, but you should avoid doing so at any cost.
You should take time to read the fine print of the loan and if possible, seek the help of someone who has a better understanding of financial transactions.
Even if you find the sales person very trustworthy, or he insists on signing the contract too, do not sign the contract until you are convinced of its terms.
Sixth mistake – choosing more credit amount / Opting for a High Credit Amount
Depending on your income and credit score, you may be eligible for a loan of a very large amount.
But this does not mean that you take more loan than you need. You must understand that a large loan amount will bring with you a large EMI and a larger interest component.
therefore, before applying for a personal loan, assess how much money you need, and choose the same loan amount as you need.
Although, doing this may seem a bit restrictive, but it will ensure that you will be able to pay your EMI efficiently and in the long run it will be economical for you.
Seventh Mistake – No Co-signer / Not Having a Co-Signer On Board
Of course, not every person taking a personal loan needs a co-signor or co-signer. However, if your credit score is low, and you are in dire need of a loan amount, then you must include a co-signer with a high score or good income.
Doing this can make you eligible for loan without much hassle. Also, it can get you a loan at a relatively low interest rate.
Eighth mistake – being ignorant of prepayment penalty / Being Unaware of the Prepayment Penalty
Paying off the total loan before the maturity date not only eliminates your financial burden as soon as possible but also saves a lot of money by eliminating the interest going into EMI.
However, most lenders impose a prepayment penalty which can range from 0.5% to 5% of the remaining loan amount.
To ensure that you can prepay the loan at your convenience, read it carefully before signing the loan agreement, and make sure that the lender does not impose any penalty or nominal penalty on prepaying the loan.
Ninth Mistake – Making Late Payments / Making Late Payments
It is not a hidden matter that your credit score deteriorates on late payment of loan. In addition, most lenders also pay late payment fee penalty for late payment. Therefore, you should not make this mistake at any cost.
A very good way to fill the loan in time is that you can opt for Electronic Clearance Service (ECS) or set an automatic payment of any other way.
Tenth Mistake – Defaulting on loan payment
This is the biggest mistake you can make related to personal loans.
Initially, the lender can send you a notice regarding this. If you are still unable to deposit the loan amount, the bank can take the help of collection agents, which can cause you a lot of inconvenience.
And of course, the default in making loan payments will also be reflected in your credit history and will affect your credit worthiness in the long run. And it will be very difficult for you to take any loan in future.