28-year old Rohit was in a hurry to get a Rs 3-lakh personal loan. Naturally, he signed up with the very first lender who told him that he needs to pay ‘just’ Rs 7500 a month as EMI on account of his excellent personal loan eligibility. Turns out that Rohit was sold a very expensive personal loan charging an interest rate of 17% per annum. The worst part, Rohit signed on documents that made him legally liable to pay EMIs for 5 long years! One needs to be extra-cautious when applying for a personal Loan. A single mistake, like in case of Rohit, can lead to big financial trouble.
A personal loan is a convenient answer to our immediate financial needs. But with the pre-approved offer and easy online application process, also comes the responsibility of choosing personal loans carefully. Here are the top five pitfalls to avoid. Read them carefully.
1. Don’t take loans you cannot repay
We usually take a personal loan to avoid a financial problem. However, if not chosen properly such loan can also cause a new financial problem. Before considering a certain loan amount, make sure that you can actually repay the debt. Many people take loans that are far beyond their affordability.
2. Too many loan applications are no good
Shopping for a personal loan is not similar to shopping for groceries. Each time you seek a loan from a financial lender, a personal loan query is raised. This is recorded on your individual credit report along with the date. With each query, your credit score actually gets reduced. This means your loan application may get rejected or may lead to a higher interest rate. If you meet personal loan eligibility of a lender and feel the personal loan deal is good after comparing rates, go for it.
3. Never hide existing loan details
It is easy to find out and verify details of your existing loans and other financial obligations. If you fail to disclose them properly, you are making a big mistake. Some people hide their already high existing liabilities to get new personal loans. If the lender finds out you lied, they will either reject the loan or charge higher interest rates. Both the outcomes are not good for you.
4. Read the fine-print
Many personal loan applicants just skim through the paperwork, without reading the fine print carefully. Naturally, they do not understand all the terms of conditions, applicable charges and interest rates on the personal loans. If you do not want to be unnecessarily charged later, never ignore reading the documents carefully and fully.
5. Lower for longer not always right
Often borrowers opt for a longer tenure with lower EMIs. But longer the loan repayment tenure, the higher is the amount of interest you pay. It is always advisable to choose the shortest loan tenure possible, depending on your repayment capacity. A Rs 4.5 lakh loan can have a 5-year EMI of Rs 10705 and a 3-year EMI of Rs 15599, but the total interest in case of Rs 10705 EMI is 40% more than an EMI of Rs 15599!
Like every other thing, personal loans should be handled carefully. Try to carefully consider and look at all the different areas before taking a personal loan. To avoid such mistakes, it is best to take personal loans from reputed financial institutions like Tata Capital who have a fantastic track-record and high corporate governance standards built over many years.