A personal loan is one of the most preferred forms of financial aid when it comes to a financial crunch. Getting a personal loan is easy today, but the same friendly personal loan can become a huge financial obligation if you make a wrong move. Here is a look at five common personal loan-related mistakes that you should avoid. 1: Taking more than one personal loan A personal loan is a costly form of credit—rely on it only if you have a real financial need and have no other options to raise money. Many borrowers, who are prone to taking loans for every small reason, make it a matter of routine to service more than one personal loan at a time. Servicing more than one costly loan can not only damage your finances and savings, but also dents your credit score. Therefore, do not rush into applying for a personal loan for any financial requirements. Understand your requirements first and then apply with one single financial entity after checking all possible options of raising money. 2: Borrowing more than what you can repay It is easy to get carried away when borrowing money, especially in times where applying for a personal loan can be done at the click of a button using your mobile. Many personal loan borrowers end up committing the mistake of borrowing way more than what they require, which they eventually find difficult to repay on time. Remember, a personal loan is your friend, but with the high interest rates involved, it can become a tight rope walk especially if you have too much to repay. Take a deep breath before falling for pre-approved loan offers. Take a loan only if you need it and up to the limit of your actual need only. Limit your personal loan borrowing to 35-40% of your monthly income after deducting your monthly expenses. 3: Taking a personal loan without reading the fine print How often do you read the fine print when availing any service? If you are signing on the dotted line without going through the details of your personal loan, you are putting yourself at a grave financial risk. If there is any dispute or misunderstanding between you and the lending institution, the fine print or terms and conditions of the loan form the boundaries for the dispute resolution. If you have signed on the dotted line without reading, you will have to fulfill the obligations as listed in the loan terms and conditions even if you do not agree to them in principle. Make it a point to read and understand the details of your loan terms and conditions, like pre-closure charges, pre-payment charges, interest rates etc. A personal loan may be an emergency loan, but do not sign on the loan terms and conditions in a hurry. 4: Opting for a long tenure Do not take a personal loan for the maximum possible tenure just because the lender is offering it. Financial institutions offer personal loans up to 7 years. The higher your loan tenure, the higher will be your final amount repayable for the loan. For example, if you take a personal loan of Rs. 3,50,000 with an interest rate of 17.5% for 3 years, you end up repaying Rs. 4,52,366 (at an EMI of Rs. 12,566). Now, if you opt for a long tenure of say 7 years for the same loan, your total payment jumps to Rs. 6,09,338 (at an EMI of Rs.7254). The EMI on a longer tenure may look pocket-friendly, but you end by paying more overall. So, choose the shortest tenure period that is comfortable for you instead of opting for a long tenure. 5: Taking the loan without comparing Just because a personal loan is easily available, it does not mean it is the best solution for your need. For example, if you are an existing home loan borrower, opting for a top up loan can be much more pocket-friendly for you as compared to a personal loan. There are many other easy loan options which are cheaper than a personal loan, like loan against FD, gold loan, loan against security, etc. Compare the various options available with your bank rather than committing yourself to a personal loan. Also, compare the interest rates of personal loans of various banks and NBFCs before taking a final call. If a bank is offering you a lower rate of interest, understand how the interest rate is being calculated. For example, a bank can offer you a lower rate of interest for personal loan calculated as a flat rate. Whereas, a higher floating rate of interest may work more to your benefit than a low interest rate calculated as a flat rate. Personal loans are time-tested financial offerings that are helpful to ride over financial hardships, but ensure you avoid the above pitfalls so as to make your personal loan work to your advantage.
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