Availing personal loans is a convenient way to gain access to unsecured credit. You can use the finances obtained for any purpose you desire, get marriage preparations underway, complete necessary home restoration work, kickstart a business venture, or even rejuvenate at a relaxing holiday destination.
Today, getting a personal loan is easier than ever as you can apply online in minutes. However, amidst enthusiasm, you may find yourself facing a loan rejection or settling for second best. To avoid this, steer clear of these six common mistakes when applying for a personal loan.
1) Choosing Loan Amount Arbitrarily
To start with, estimate how much financial assistance you require from your lender. Quoting a wide range, such as between Rs.15 lakh and Rs.20 lakh, indicates ambiguity and causes your lender to question whether you have given any serious thoughts to repayment. While borrowing too little will not help you address your needs, borrowing too much can put a heavy load on your bank balance when the time of repayment comes. The key is to discern the amount you require and find a lender offering you that affordable.
One way that you can tackle this problem smartly is by opting for a flexible personal loan offered by lenders. This feature allows you to borrow multiple times from your sanction and pay interest only on the amount you have withdrawn. This means that you can borrow as you need, without wasting money on interest and without having to file fresh applications every time you need more funds.
2) Not assessing your eligibility
From the perspective of your financier, gauging your repayment capabilities is of utmost importance. This is even more so considering that personal loans are collateral-free. To be sure of repayment, financiers list personal loan eligibility criteria that center around your income status in addition to basic KYC details. For example, your issuer may require you to be salaried or self-employed and you may have to prove the same via personal loan documents like salary slips or bank statements.
Additionally, lenders require that you have a healthy credit score as this metric provides a glimpse at your creditworthiness and summarises your past credit history. So, before you apply for a loan, visit your financier’s website or branch and ensure that you meet the criteria and credit score requirements. Ignoring this can not only lead to rejection of your application but also a dent in your credit score. The latter is due to the fact that when you apply for a loan, the lender sends a hard inquiry to a credit bureau to check your credit score.
3) Ignoring the Importance of Shorter Tenor
While planning your repayment, you may be tempted to choose the longest tenor your lender offers you. This is understandable since the longer the tenor, the smaller the monthly installments on your loan. However, there is one disadvantage that comes bundled with selecting the longest possible tenor. The amount you pay as interest over the tenor increases. This implies that even though your EMIs may be more, you pay less when you go in for a shorter term.
4) Hiding Presence of Existing Loans
Whether you have applied online or via a branch in person, you may consider hiding the fact that you are repaying other loans like a car loan or an educational loan at the moment. Financiers are careful about existing debt as it affects your debt-to-income ratio. The greater your current debt, the lower the amount you can dedicate towards repayment of new loans. So, don’t believe you can fool your lender as your credit report will reveal your debts.
5) Skimming Through Fine Print
With the onset of online application procedures, you may find yourself swiftly clicking ‘I agree’ without really reading the fine print. Even in pen and paper applications, you may find yourself simply signing at the places marked. Practices like these can leave you with regret in the future and cost you too. So, pay attention to essential details like processing fees and late penalty charges, apart from other important information.
6) Failing to Compare Lenders
Do not jump at the first personal loan offer that attracts your attention or comes to you via SMS or email. Scrutinize lenders’ websites as you will then learn about each lender’s USPs as well as read customer testimonials. This will help you bag the best deal.
One more thing, the financier may offer you a large loan amount, you need to ask yourself two questions. “How much do I need?” and “How much can I afford?” Affordability is measured primarily by your debt-to-income ratio. This is the proportion of monthly income that goes towards clearing all kinds of debts.
Strive for a ratio that is in the range of around 30% as you require the balance to take care of other obligations. If you really require more finances, look for additional income sources as this will decrease the ratio and thereby make the loan more affordable for you. If boosting your income isn’t a possibility, consider reducing the loan amount.
For instance, when you apply for a personal loan, you get access to funds up to Rs.25 lakh at affordable interest rates and on flexible terms. The tenors range from 12 to 60 months and you can get the best out of your loan by using the flex loan facility. As described before, this loan gives you added flexibility on when you use your sanctioned amount. Additionally, it allows you to make prepayments and even redraw the prepaid amount at zero charges. Moreover, you can choose to pay interest-only EMIs and repay the principal at the end of the tenor to manage your cash flow better. This also allows you to reduce your EMIs by up to 45%.
If that’s not enough, the personal loan documents required and eligibility criteria for this offering are also kept to the minimum and upon approval, the money is disbursed to your bank in just 24 hours. In fact, you can speed up your approval If you go online and check your pre-approved personal loan offers by entering the few basic details on the lender’s website. For all these, you need to have a good CIBIL score along with good credit history.