Want to try a personal loan? It is a good decision, especially if you need funds urgently. Borrowing money is something everyone will do at some point in time. However, there are mistakes associated with taking personal loans. You need to be aware of the common pitfalls associated with taking personal loans and how to avoid them. In this post, we will discuss common mistakes borrowers make while taking out personal loans and how you can avoid them.
A personal loan is simply an unsecured loan offered by banks or financial institutions to those people who want to finance their needs and are eligible. This type of loan does not require any form of asset as security, nor is it for a specific purpose. You can use it for any purpose, whether it is a home improvement project, covering medical expenses, consolidating debt, or catering to any personal need you might have.
Below are the common mistakes to avoid:
Not Checking Your Credit Score
Credit scores play a pivotal role in personal loan applications. It will help determine the rate you will pay and if your loan application will be approved. Lenders will check credit scores to understand the repayment capability of the borrower. Therefore, before you apply for a personal loan online, check your score for any mistakes and ensure it is accurate. In case there are errors in your credit score, correct them immediately to help improve the chances of your loan approval.
Not Comparing the Interest Rates
Another common mistake borrowers make while applying for a loan is not comparing rates offered by various lenders. You may end up paying higher interest rates, which means more money if you do not compare what other lenders are offering. So, before you apply for a loan, do research on lenders online, check their sites, or get quotes. This way, you will also know the fees associated with the loans when you properly do your research.
Borrowing More Amount Than You Can Repay
You only need to borrow what you know you can repay without difficulty. To know the amount you need to borrow, determine your monthly bills and the duration you need the loan for. Then analyze the funds to know if they are enough to pay back the loan within the stipulated period. Taking an amount, you can’t repay is a huge mistake you should avoid while applying for any loan.
Applying for Many Loans at Once
Applying for multiple loans is very tempting since you are sure if one fails, another one might go through. However, the aftermath is that your credit score could be affected negatively. Lenders will see you as being unstable financially and thus deny your application right away. As such, it is essential to do proper research and then apply for the loan you are confident will be approved. Applying for many loans at once will only increase the chances of rejection.
Not Checking Terms & Conditions
Every lender offers their loan terms and conditions that every borrower needs to go through before deciding on whether to take the loan. These terms include penalties, fees, and other costs. Thus, it is important to read them thoroughly and understand them. You can as well ask questions and seek clarification where you do not understand.
Not Determining your Eligibility
Applying for a loan you aren’t qualified for will automatically be denied. Each lender thoroughly investigates before accepting any application. When your application gets rejected, it will lower your credit score. Thus, it is important to know your eligibility beforehand to increase the chance of getting approved.
Improper Documentation
Incorrect documents during loan application are also major mistakes during loan application that could result in loan rejection. Different lenders require you to provide various documentation as proof of your identity, address, and income. Though, some lenders can offer loan without documents with only minimal paperwork.
Some of the common documents include Aadhaar, PAN, Payslip, bank statement, Credit card, Utility Bill, etc. Make sure you provide all the needed documentation, and it should be genuine.
Miscalculating fees
When applying for a loan, you’ll know the monthly payments based on APR and the period for the repayment. However, it is easier to overlook the hidden fees. You may be required to pay an origination fee for document preparation and checking your score. Some lenders can also charge an application fee. Missing payments may also result in a late fee, or you may be charged a prepayment penalty for early loan repayment. Therefore, you must understand all the charges associated with the loans to know how much you will be paying.
Conclusion
If you have decided that a loan is necessary, do not make a hasty decision. This will prevent rejections from the lenders. Ultimately, you should look for a loan with competitive rates that you can afford.
Avoiding common financial mistakes is the key, as it can save you from costly consequences later. Take time to research lenders, know your score, and read and understand the terms of different lenders. With this in mind, your loan approval will be much easier.