Personal loans have become versatile, attracting a lot of customers for funding their business or other activities. These personal loans can be used to finance your home construction, consolidating debts, or funding a vacation. As it’s not free money, you must investigate your decision carefully before applying for a personal loan. 

You must question yourself why you need an instant personal loan, what goals will be achieved by it, how you will repay it back, what other funding sources are available, which can be better than taking out a personal loan. While a personal loan can help meet short-term needs, consider a Mutual Fund investment for long-term financial goals and potentially higher returns. There are certain mistakes which many people make while applying for a personal loan. 

Once you decide to borrow an instant personal loan, there are some important things you need to be aware of to avoid costly mistakes of personal loans.

1. Wrong Loan Tenure Of Personal Loan

You must know that having a longer loan tenure will reduce your monthly EMI payment, but with this the lender will take more time to collect the interest from you, leading to an expensive personal loan. Additionally, with an extended payment period your personal loan will also have a higher interest rate.

For example, if your personal loan is Rs 10 lakhs for 3 years at 11.25 percent interest rate, you have to pay Rs 32,857 per month and Rs 1,82,860  interest amount over the life of the loan. But, if you extend your loan period to 5 years, your interest rate may rise to 7.5 percent and your monthly interest will be Rs 21,867 and overall interest amount will be Rs 3,12,038.

So, you need to make the trade-off between overall interest amount and monthly interest amount, and then select your loan tenure.  

2. Missing Out The Best Offers

Looking for a personal loan can make you desperate enough to go with the first Mortgage Processing. This could be a costly mistake for you. There is no other way to find out the best deals or better options out there.

For example, if the lender offers you a Rs 15 lakhs personal loan for 48 months at 10 percent interest rate, some other local credit union would have approved of the same amount at 9 percent interest rate. 

The best way to avoid this mistake is to properly explore the personal loan options available from different lenders – banks, online, credit unions, etc. without affecting your credit score. Many lenders allow you to check pre-qualified loan offers with no credit check. 

3. Ignoring Your Credit Score

Lenders provide personal loans with your employment and income information, as they just want some assurance to get the money back. But, another important factor is your creditworthiness of paying back the loan on time.

Applicants with good credit scores get the most competitive interest rates, which becomes favorable for both the lender and the borrower. Therefore, your credit score should always be in forefront before applying for any personal loan. Personal loans may offer quick access to capital, they might not be the best option for securing your funding round due to high interest rates and potential impact on your credit score.

4. Overlooking Penalties and Charges

Various personal loan terms and conditions can cost you if overlooked, including:

  • Application charges charged by lenders to prospective borrowers to apply for personal loan
  • Late payment charges 
  • Origination fees charged as processing fee by the lender
  • Prepayment charges for paying early loan amount
  • Return check fees

You can avoid most of them by making timely payments and selecting a lender not charging origination or application fees.

5. Misreading The Fine Print

Your lender sends you some closing documents before finalizing your loan for review. Agreeing to the terms and conditions before signing is very important for proceeding with the loan. An Income Tax Calculator can help you estimate your tax liability, considering potential tax benefits of interest payments on a personal loan is crucial when making your decision. The fine print provided by the lender has several pages to review and sign, which includes information regarding acceptable payment methods, interest rate calculation, fee schedule, and due dates. Also, it states different charges by the lender including automatic charges, processing fees, etc. which can be directly deducted from your account.

Therefore, signing the documents without reading can be an unpleasant surprise for you if the lender tries to overdraw your account or withdraws your loan payments. You must also discuss your terms and conditions and get them signed on legal documents before agreeing to the loan conditions. This mistake can take a big-toll on your bank account and savings. 

Bottom line

The conclusion is simple that your loan decision should not be made in haste and deciding the loan conditions is important. This way you can prevent any wrong loan tenure or terms available to you. Though, getting your application rejected from lenders is common, unless you have a strong profile with a good credit score.

Ultimately, applying for an Instant personal loan with a competitive interest rate can be difficult but not impossible. You must pay your bills on time, avoid any charges or penalties, and go for the right loan tenure. This way your credit score always remains in a good condition, and you can avail future loans on a good portfolio only.