Seven Personal Loan Mistakes To Avoid

Personal loans are a great option to finance your emergency requirements. These loans have very low processing time, easy documentation process, do not require any collateral and can be used for end number of purposes. However, like all other loans, these loans have some criterion to fulfill, failing which will lead to the rejection of your loan application. Moreover, some wrong judgments or mistakes on your part may also lead to higher interest payouts and can land you in a debt trap.

Here are some common mistakes that you should avoid while applying for personal loans:

Not checking your credit report: Your existing lenders may fail to update your loan repayments to credit bureaus and this could result in closed loans or paid off dues continuing to appear in your credit report. Clerical errors on credit bureau's or lender's part may also lead to wrong information being included in your credit report.

As lenders consider your credit score while approving personal loan application or setting interest rates on them, it is important for you to check your credit report and rectify any errors in it, before applying for it.

Not considering repayment capacity: Personal loan applicants often overstretch their finances by borrowing beyond their repayment capacity and end up underpaying. While overstretching may affect your long term investment goals and even lead to EMI defaults; underpayment would push you towards opting for longer tenure loan and this could result in higher interest payouts.

Thus, take into account your daily-living expenses, existing debts and investments for financial goals while calculating your loan repayment capacity.

Submitting multiple personal loans applications: Lenders report each loan applications made by you to the credit bureau and this gets recorded in the enquiry section of your report. Too many loan applications across various lenders within a short span of time may drastically bring down your credit score. The lenders may also perceive you to be a credit-hungry borrower and become over cautious while approving your personal loan application leading to the rejection of your loan application or higher interest rate on your loan.

Not considering alternative loan instruments: The interest rates on personal loans are significantly higher than most of the alternative credit options such as loan against FDs, loan against securities, gold loans or top-up loans. Being unsecured loans, the interest rates on personal loans can go up to as high as 24 per cent while interest rates on loans against FDs or securities and top-up loans range between 10 per cent and 15 per cent.

People having sizeable assets in the form of FDs, mutual funds or shares but not willing to redeem/sell them can consider loan against FDs/securities in lieu of personal loans for funding their emergency requirements. Existing home loan borrowers should prefer top-up loans as they come with lower interest rates and higher tenure than personal loans.

Not comparing personal loan offers from various lenders: Many borrowers make the mistake of opting for pre-approved personal loans without undertaking a proper market survey. Many also limit their loan enquiry to banks where they have their savings account. As personal loan space is a highly competitive sector serviced by a large number of banks & NBFCs, their charges and interest rates for the same loan amount and same credit score may vary widely.

Undertake a proper market survey and back it with good bargaining to save money on interest payouts and charges. You can also take the help of online portals to compare the interest rates, loan amount, prepayment charges and other terms & conditions of personal loans from various lenders.

Not disclosing your existing debts: Many borrowers deliberately understate their existing debt repayments in the hope of getting a higher loan amount. However, this will easily misfire on you as lenders would refer to your credit reports before approving loan amount and this will inevitably include all your existing debt obligations (including outstanding dues on your credit card) in it. This kind of wilful misinformation can also lead to the rejection of your loan application.

Taking personal loan for further investment: In India, banks and NBFCs are refrained from lending unsecured loans for investment in speculative instruments. However, sometimes people circumvent this rule by taking personal loans to finance their equity investments, especially during bullish markets. This can be a very risky proposition because the rate of return has to be higher than the rate of interest on your loan, which may go up to as high as 24 per cent p.a. Besides, market down-turn can erode your capital and this may affect your financial well-being.

Although personal loans come with very high interest rates and should be treated as among the last options for availing credit, they can come handy during immediate cash requirements, especially when low processing time becomes a major factor. As credit score will play an important role in your loan application, try to maintain a good credit score for fast loan approval by regularly paying your debt repayments and periodically checking your credit score.