A personal loan might be the right financial instrument to get an immediate fill-up of a power reservoir under strictly regulated usage. You might use that money for medical bills, a family wedding, or an emergency trip, which is a vacation that became necessary suddenly and without planning. It’s a fast way of getting money without giving any collateral if that’s the case. However, in their hurry to get the best deal, many borrowers are not careful and end up making errors that can change their loan conditions or lead to rejection.
By getting to know the signs of what you need to beware of before you apply, you will be able to make more informed decisions and raise your chances of taking the best personal loan that suits your needs. We will now find out what are common traps that applicants fall into and how to avoid them.
Not Checking Your Credit Score
Lenders use your credit score to decide whether or not they will give you a personal loan first and they get this information when you submit an application. It gives a concise picture of your repayment history as well as your general financial management. A bad credit history is going to limit your loan approval options and the interest rate charged during the loan may go up.
A big number of borrowers have a tendency to apply without checking their credit score beforehand, so they get shocked when their application is declined. Check your score from an official credit bureau before applying. If your score is not as good as you expected, spend some time fixing it by settling whatever you owe and keeping to the payment schedule before you apply.
Applying Without Comparing Lenders
One of the worst mistakes that you can make is to apply to the first lender that you come across without comparing other options. Various lenders may have different interest rates, processing fees, repayment flexibility, and customer service.
Finding a lender that offers you the best loan terms after doing a comparison is much easier. Look at the total cost of the loan, not just the EMI. Even a small difference in interest rate can significantly affect the total repayment amount.
Borrowing More Than You Need
Just because you are eligible for a higher loan amount, it is not necessary that you must take it. Take a loan just for the amount that you actually need and can easily repay. Many borrowers get carried away by larger loan approvals and thus end up with high EMIs that take a toll on their monthly budgets.
Buying more than you actually need will also result in you paying more interest during the entire loan period. The best personal loan is the one that solves your real need with the most minimum stress.
Ignoring the Fine Print
Most borrowers tend to focus on EMI and interest rate only and as a result, they fail to read the loan agreement thoroughly. Understanding and knowing the entirety of the contract, like the prepayment charges, late payment penalties, processing fees, and loan cancellation rules, is very important.
Some banks may give out lower rates but this is only a facade as they have hidden high charges in the background. Being fully aware of the content of the contract ensures that there will be no issues during the process. If it’s not clear, request that the lender explain it in detail before you sign.
Providing Incomplete or Incorrect Information
Many applicants are either greatly delayed or rejected outright because they have not supplied complete or accurate information. Lenders cross-check the data given by you against your documents. If there is some inconsistency in it, you may be rejected or asked for verification again.
Before submitting your application, always check again if everything is correct in it. Make sure that your income, employment, and contact information are true and supported by valid documents. A clean and complete application will help the process of approval to be done faster.
Applying to Multiple Lenders Simultaneously
Though it may seem like a smart move to apply to different lenders all at once so that you have a better chance of getting approved, this is not always the case. Every loan application results in a hard inquiry on your credit report. Several enquiries within a short period can reduce your credit score and give an impression that you are in need of credit.
Better still, you can utilize the eligibility and pre-qualification tools to come up with a list of possible lenders. Go ahead and submit only one or two applications, among those you feel are most likely to give you a loan, based on your profile.
Not Assessing Your Repayment Capacity
First of all, figure out the max EMI that you can afford each month without giving up anything important. Take an online EMI calculator to get the picture if it suits your income and the tenure of the repayment.
If your budget is stretched to accommodate a higher EMI, soon you will find yourself missing payments which will consequently lead to a poor credit score and your borrowing ability in the future being adversely affected. The loan should be a relief to your financial situation and not a burden.
Overlooking the Impact of Existing Loans
In case you have ongoing loans or credit card bills, they count toward your debt-to-income ratio. The lenders use this ratio when they decide how much money they can give you to repay your loans. If most of your income is already used to make existing EMIs, your new loan application may be rejected or get a lower approved amount.
Instead of applying for a new loan, you should repay or reduce your current liabilities. This will not only increase your eligibility, but also allow you to get the instant personal loan with more favorable terms.
Conclusion
It is a fact that a personal loan application requires a planned decision rather than an impulsive one. The good news is that you can save a lot of money by avoiding the most frequent mistakes, for example, not checking your credit score, taking a larger amount than you actually need, or failing to compare the options. Thorough planning, transparent paperwork, and reasonable decisions are the ways to get the perfect personal loan that fits your needs without burdening you financially in the long run.
