A Personal Loan is frequently one of the most dependable ways to obtain additional income. It is not only available to everyone with a good credit score and a steady source of income but it is also completed swiftly. Making it the go-to loan option for anyone in critical need of cash. Despite the ease with which a Personal Loan can be obtained as a credit product. It is critical to be aware of the most common borrowing errors. Otherwise, it could develop into a hasty and costly blunder.
Being unaware of credit score
Eligibility for a personal loan is mostly determined by the borrower’s credit score. Your credit score indicates how creditworthy you are. That instance, if you have a high credit score, the lender will consider you qualified for a loan. If your credit score is low, the lender may reject your application, and multiple rejections of personal loan applications may cause your credit score to suffer even more damage.
Knowing your score before you apply. On the other hand, gives you more negotiating power over the terms of the Personal Loan arrangement. As a result, knowing your score before applying is always a good idea. You can arrange the timing application and focus on improving your score first if you have a poor score.
Not being pre-qualified
When taking out a Personal Loan, identify your lender ahead of time and contact them to confirm that you are prequalified for the loan. The lender will then do a mild credit check to verify if you meet the requirements. While this will not affect your credit score, it will provide you with valuable information about your creditworthiness. Most lenders will give you a sneak peek at your loan rate and terms at this point. This will assist you in being mentally and financially prepared before applying for a Personal Loan.
Concentrating only on the EMI
When looking for a Personal Loan, it’s understandable that your attention is drawn to the EMI payment. While the Principal Component and Interest Component will make up the majority of your EMI, it may also include certain other costs that you are unaware of. A processing fee, a late fee, a prepayment penalty, etc are examples of these. Use a personal loan emi calculator to calculate monthly EMI and total interest to be paid.
Using your Personal Loan to make unnecessary purchases
A Personal Loan, regardless of its ease of access. Is still a debt that accrues interest and must be returned in a timely and efficient manner. As a result, you should reconsider taking out a Personal Loan to buy pricey gifts, gadgets, or luxury products, or to go on an extravagant vacation.
A loan should be used for items that are either critical or urgent. Such as debt consolidation, house improvement, business expansion, or medical emergency, as much as possible. Otherwise, you may find it difficult to repay the loan if you don’t have a repayment plan in place.
Blindly Trusting the Salesperson
A Personal Loan is a significant financial commitment with a high-interest rate. Although it may be tempting to believe the salesman and accept the loan agreement without thoroughly reviewing the loan’s terms and conditions, you should avoid doing so at all costs. Take the time to read the loan’s fine print, and if possible, enlist the assistance of someone with a greater knowledge of finance.
Opting for a high credit amount
Depending on your income and credit score, you may be able to borrow a significant amount of money. This does not, however, indicate that you should take out a larger loan than you require. You should be aware that a larger loan amount will result in a higher EMI, as well as a greater interest outlay.
As a result, before applying for a loan, evaluate your financial needs and only take out a loan for the amount you require. Although it may feel restricted at first. It will ensure prompt repayment of your EMIs and will save you money in the long term.
Not having a co-signer
Of course, a co-signer is not required for every Personal Loan borrower. If your credit score is low and you urgently require the loan amount. You will need a co-signer with a higher credit score or a larger level of income. This may make it easier for you to qualify for the loan. It will also assist you in obtaining the loan at a lesser interest rate.
Not Knowing the Prepayment Penalty
Prepaying the loan before the due date not only helps you get rid of the financial burden as soon as possible. But also saves you a significant amount of money that would otherwise be spent on the interest component of the EMI. Most lenders, however, charge a prepayment penalty, which can range from 0.5 percent to 5 percent of the outstanding loan amount. Read the fine print of the loan agreement before signing it to make sure you can prepay the loan whenever you choose. Also, make sure the lender charges no or minor penalties for early repayment.
Making late payments
A late loan payment lowers your credit score, which is a well-known truth. Furthermore, most lenders charge a late fee. As a result, you must avoid making this error at all costs. Using an Electronic Clearance Service or setting up some other type of automatic payment on your Personal Loan is an excellent approach to assure timely payments.
Defaulting on the loan payment
This is by far the most common error people make when taking out a personal loan. To begin, the lender may send you a note informing you of the situation. If you are still unable to return the loan, the bank may enlist the help of collection agents. Which will put you in a lot of trouble. Of course, a loan default will appear on your credit report and will harm your creditworthiness for a long time. Making it extremely difficult for you to qualify for another loan soon.