It is easy to get a personal loan nowadays. Banks offer loans with low-interest rates, and at times you can get your loan approved within a day or even on the spot. There are many takers for personal loans due to their availability and convenience.
But personal loans can become an expensive debt if some key aspects are not followed. Do not take a personal loan for granted as it can lead to financial disaster. Here is a list of things you should not do with a personal loan.
Following these tips will help you to get the best value out of your loan.
- Not Comparing
This is the biggest mistake many make. It is indeed tempting to agree to the first loan offered to you especially when you are in dire need of money. But never fall for this. You can get a loan that is tailored to your needs only when you compare.
It is easy to compare personal loans nowadays. You can find many websites that allow you to compare loans from different banks. Take a look at all the benefits and features a loan is offering before you take it. You can also choose a loan based on your income and budget.
- Applying At Multiple Places
Another mistake is submitting multiple applications at various banks at the same time. While you may think that this can increase your chances of getting a loan, it only results in the opposite. Banks may reject your loan when you apply at several places.
This makes you look desperate for money and it will affect your credit score as well. Instead of applying at multiple places, compare and choose a loan that is ideal for you. Then apply for that loan with relevant paperwork.
- Borrowing a Huge Amount
It is so easy to borrow large amounts as loans are easily available. Do not be greedy. Even if you are eligible for a large amount, do not go for it unless necessary. Do remember that personal loans are not a gift.
You have to pay back the money you owe along with the interest. Borrowing large sums would incur high-interest rates. Save the money you may have to pay for interest by borrowing an amount that you can afford to repay.
- Opting For a Long Tenure
A long tenure with affordable instalments can seem to be an ideal loan. But keep in mind that a long tenure attracts high-interest rates. Personal loans are a debt, and it is always the best decision to settle a debt as soon as possible.
The interest that you may pay for a long tenure would be higher than you think. Realise that you would be better off saving that amount of money rather than paying interest.
Opt for short-term loans so that you pay them off quickly. Use an online loan calculator to calculate interest rates before choosing loan tenure.
- Not Reading the Fine Print
Another common mistake many make is not reading the loan contract thoroughly. All details of your loan are stated in the loan agreement. An agreement would include details of interest, fees and charges and various terms and conditions associated with your loan.
Read through the agreement fully before signing on it. Being aware of everything connected with your loan can help you to plan on repaying your loan on time. If possible, ask for a brochure or an application form beforehand and take it home to read it properly.
Sign a loan contract only when you are sure of all loan details and conditions.
- Missing Payments
Missing loan payments can prove to be quite disastrous. You may have to pay late payment fees which are extra charges. Your credit score would dip low making it really difficult to procure other financial products in the future.
Banks can even take legal action against someone who defaults on their loan. Pay your loan instalments on or before the due date. This will ensure a good working relationship with your bank that will help you in the future.
Paying on time will increase your credit rating. Plan your loan repayments properly. Set aside a sum each month to repay your loan. Set up standing instructions so that your payment is done on time even if you forget about it for any reason.
- Borrowing to Invest or Splurge
Never borrow a loan to invest or to splurge on luxuries. Unlike home loans or hire purchase loans, personal loans can be taken for any reason. But investments or shopping should never be one of those reasons. Take a loan only for a valid financial emergency.
Never use a loan to invest. You may be hoping for high returns, but what happens if you do not get those returns? You may end up with a debt that can be quite stressful for you and your family.
- Borrowing for Others
Another no-no is to borrow a loan for others. This includes even for close friends or relatives. Though it is a kind act to help someone in need especially someone close to you, it can prove to be a disaster. If that person is unable to pay the loan, you have to pay for it out of your own expenses.
Late payments can decrease your credit rating. You will end up with a debt for a loan you never used. This can also affect the relationship you have with the other person.
You can help out in other ways such as lending them some money or helping them to borrow a loan under their name.
- Taking Multiple Loans
There is no reason to take out multiple loans at the same time. It becomes really difficult to repay all loans on time. If you think taking out an extra loan is financially necessary, you need to think otherwise.
Multiple loans are definitely a cause for concern as it means you are not planning your finances properly. Instead of taking out another loan, try to tap into other resources. Borrow from family or friends.
First, tackle the financial problem. Try to earn more income to meet your financial needs. Take up a part-time job. Evaluate your finances and create a reasonable budget. Adhere to the budget and try to settle your existing loans as quickly as possible.
- Not Taking Insurance
You may wonder what insurance has to do with your personal loan. Insurance will help you in during critical times. If you take up a loan and later find it difficult to repay it for reasons such as total or permanent disability, insurance can cover you.
Instead of additional burden on you or your family during difficult times, insurance will help you to repay your loan. Insurance not only helps financially but also emotionally during difficult times. Take a sufficient insurance plan along with your personal loan.
What to Do With Personal Loans?
Use your loan productively. Take a loan for a suitable purpose and fulfil the purpose. Pay all instalments on time and settle your loan quickly. Avoid taking unnecessary personal loans. When you do take one, do not take it for granted.