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Getting approval for a personal loan application might be a complex journey for every salaried individual who needs instant funds. However, the best part of applying for a personal loan is that it offers immediate cash. Personal loans can be used for any purpose, from higher education to weddings. With excellent interest rates and repayment tenure, a personal loan becomes the best consideration. However, there are certain things you need to follow when it comes to applying for a personal loan. This post explains the top personal loan mistakes one should avoid while taking a personal loan.
The following points narrate the top nine personal loan mistakes to avoid while applying for loan:
Underestimating the eligibility criteria for personal loan applications is the prime mistake you should avoid. Before you apply for a personal loan, you should look for the eligibility criteria for which your application can be quickly approved.
Remember one thing: different lending institutes and lenders have different requirements. However, the following are the basic needs that a candidate must meet. So, while assessing your eligibility, ensure you keep these things in mind:
One quick note: Lenders appreciate applications of candidates who have a decent CIBIL score. They approve these applications more quickly and offer lower interest rates.
There's a specific processing fee charged by lending institutes, and it may vary from one lender to another. A bad credit history may reduce your chances of approval since lenders prefer those who have higher credit scores.
It's pointless to borrow more than you can afford as EMIs. Your loan process does not end with borrowing. The financial challenges start right after borrowing, when you are required to repay the money with monthly EMIs.
Not being able to repay the monthly amount, including interest, means delayed payments, which drastically impact your credit score. This is one of the crucial mistakes to avoid while applying for loan. Altogether, it results in higher interest rates for future loans. So, the next rule is to only repay the amount that you can in a timely manner.
One quick check: Your EMI should never exceed 10% of your monthly income. Even if you have other EMIs to pay every month, your total repayment should not be over 50% of your monthly income.
Thinking that a longer tenure will reduce your budget is one of the mistakes to avoid while applying for loan. A loan tenure is the total time required for the repayment. You must always consider your financial status before choosing the loan tenure since it may impact your monthly payments. Note that a longer tenure usually results in lower rates of EMIs. However, you should never fall prey to such lucrative discounts.
If you consider it for the long run, it usually results in a higher interest rate. On that note, you should also not consider shorter tenure as this might be heavy on the pocket. You can get a better insight into your personal loan tenure by calculating how much you need to pay every month. Again, your personal loan EMI rates for every month shouldn't exceed over 10%.
Someone who has a lower credit score is usually considered to have bad debt management. That might result in a denial of your personal loan application. Alternatively, it may increase the interest rate on the loan. Maintaining a good credit score is easy. You need to pay your dues on time.
A borrower's credit score can make or break a personal loan application. This three-digit number may range from 300 to 900. Someone with a 700 credit score is considered an appropriate candidate for a personal loan. If your credit score is below 600, it may result in a higher interest rate or rejection of the application. A few parameters that may impact on your credit score include the following:
Not considering the fine print of the loan application is one of the mistakes to avoid while applying for loan. Banks and financial institutes offer interest rates depending on various aspects like credit score, loan amount, term, and more. So, before you apply for a loan, you must check the loan agreements. Note that the loan agreements might be complex and lengthy. Failing to read and comprehend these terms and conditions can result in mistakes and unforeseen surprises.
Before signing the loan agreement, you should take the time to read it thoroughly. Understand the legal jargon and fine print. Learn how much the interest rate is and what the additional fees are. Are there any penalties included in case of late payment? If there are any terms you don't understand, you should always discuss them with your lender for further clarification.
Checking the loan term gives you a better understanding of whether it can suit your requirements or not. It's imperative to consider the loan term before entering into the repayment agreement with your lender. If you don't agree with something mentioned in the loan term, you may discuss it with the lender. Suppose you do not agree to the penalty charges applied in the loan repayment process. You should clarify the details with the lending institute or reject the offer and choose another lender.
Of all the personal loan mistakes to avoid, neglecting the debt consolidation option is a major blunder. You can apply for a personal loan for various purposes. Besides weddings and high education, some borrowers aim to consolidate their existing debts using personal loans.
If you want to choose this option, ensure that you explore the available lenders. Notably, debt consolidation simplifies payments and reduces your interest rates. So, you must always compare the terms before settling for the best loan option.
You may consider balance transfer credit, cards or any debt management plan. Every option comes with its advantages and disadvantages. So, it is your responsibility to evaluate the right one that meets your financial requirements.
Undermining to check payment penalties is one of the mistakes to avoid while applying for loan. A few lenders charge you prepayment penalties if you pay the loan before the due date. An individual who doesn't like struggling through monthly EMIs prefers paying off their loan before the scheduled date. Foreclosing the loan before the scheduled date may result in penalties and likely increase the cost. So, before accepting a personal loan, always review the terms based on the prepayment penalties.
A small difference in the interest rate varying from one lender to another may add more cost. That stated, one of the personal loan mistakes to avoid while applying for loan is to neglect other lending institutes after consulting one. If you don't compare interest rates from different lenders, you may end up paying more money.
So, be patient and compare interest rates from different lenders, such as credit unions, banks, and peer-to-peer lending institutes.
Simultaneously, applying for multiple loans may negatively impact the credit score. It may result in rejections and high interest rates. So, always concentrate on applying to one lender and keep the loan application to one or two lenders at a minimum.
This will avoid unnecessary credit inquiries. Surprisingly, reducing the loan applications also manages your finances and protects your CIBIL score.
Now that you understand the top mistakes to avoid while applying for loan, you can select the most suitable option from the lender.
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Unifinz Capital India Limited is a Non Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI). lendingplate is the brand name under which the company conducts its lending operations and specialises in meeting customer’s instant financial needs.
