For most of us, taking a personal loan is the most appropriate choice when it comes to meeting unexpected expenses or during a financial emergency for which we don’t have enough savings to cover the expenses.
Personal loans are a collateral-free form of a loan type with no end-use restriction put by the lender. It is the most accessible form of a loan type and also serves as a way to improve credit score.
However, despite the flexibility offered, a personal loan should never be misused as it results in complexities and a credit score downgrade, which affects the future loan application approvals.
Following are the things you should never do with a personal loan:
Taking personal loan without a plan
Personal loans are meant to take care of your urgent financial needs which you’re unable to take care through your savings and income. Before deciding on the personal loan amount, you need to factor in your income level, savings, monthly expenditure and how much monthly EMI you can afford towards servicing the loan.
And, taking a personal loan to fund your luxurious lifestyle or without planning is like committing financial suicide.
Taking a personal loan without comparison
There is a ground rule of taking a personal loan or rather any type of loan is that never take a loan without comparing loans offered by other lenders.
And, the comparison should not be done based on the interest rate but other factors like processing fee, foreclosure charges, tenor, repayment terms etc. Scrutinising all the factors helps you in finalizing the right option with the most favourable terms.
Not checking credit score
Banks and financial institutions rely heavily on the applicant’s credit score to decide whether to approve or reject a loan application. Through credit score, lenders assess your ability to repay the debt responsibly on time.
Therefore, checking your credit score before applying for a personal loan is a very important step. Because a rejected loan application negatively impacts your credit score and hampers your future loan application.
Not choosing repayment tenure wisely
Though personal loans have a repayment tenure of up to 60 months, it is important to choose the repayment tenure wisely and keep it short. Going easy on repayment tenure or having a longer repayment tenure results in a higher effective interest rate on the loan. In short, you end up paying more interest than what you have borrowed.
However, keeping the repayment tenure too short is also not helpful, as you might face the risk of missed payments which negatively affects your credit score.
Using the personal loan amount for an illegal transaction
Although there is no restriction on the use of the loan obtained under the personal loan, you cannot use the loan amount for undertaking an illegal transaction or any activity which is subject to speculation. For example, gambling, investing in the stock market, purchasing drugs etc.
Under the terms and conditions of the loan, you should always utilize the loan amount for meeting expenditures which are legal in the eyes of law. If found guilty, then you may be barred from taking any new loan by the lender.
Signing the loan agreement without reading the loan paper
Before signing the loan document, read all the terms & conditions under which loan has been approved. Understanding all these conditions at the time of signing will help you to avoid any future discrepancies and take the full benefits of the loan.
You should especially focus on the interest rate term, prepayment clause, repayment terms and tenure etc.
Borrowing more than what is needed
Based on your employment status, income and credit history, you might qualify for a higher personal loan amount and the lender may also agree on the amount. However, it is not recommended and you should borrow whatever is needed.
It is wiser to go for a small personal loan amount and quickly repay the amount rather than taking a hefty amount on loan and default or continue to pay interest.
Taking multiple personal loans
Taking multiple personal loans indicates your financial mismanagement and probably can result in a debt trap, which can affect financial well-being.
Before taking more than one personal loan, always check whether you can service the loan simultaneously without affecting your financial maths. And, it is recommended to spend just 10-15% of your total income towards servicing debt.
Well, these are some of the most common points you should keep in mind while taking a personal loan. And, never miss your EMIs because it impacts your credit score and future loan applications.