Personal loans are multipurpose loans which you can avail easily for any of your personal or business related use. The entire application process is online, the eligibility criteria are simple and you can apply for a personal loan to get funds instantly. Though availing personal loans is an easy enough affair, there are some points which you should keep in mind if you want your loan experience to be hassle-free. So, here are 4 common pitfalls of personal loans to look out for –
1. Availing a personal loan for investments
This is one of the worst mistakes which you can do when you avail a personal loan. Availing a loan only for the purpose of investing it is a bad choice. It would lead you to fall into a debt trap if the investment does not yield a return which is higher than the loan interest rate. For instance, if you avail a personal loan at a rate of 12% and the return from your investment gives you 10%, you would have to bear the additional 2% interest on your own. This would be unwise. Investments should always be done using your surplus savings and not by availing a personal loan.
2. Availing a loan which is unaffordable
When you avail a personal loan, you should always check the EMIs to ensure that the loan would be easy to repay. If you don’t check the EMIs and avail a high amount of loan, it would prove to be a financial burden. Defaulting on the repayments would not only incur heavy interest charges, but it would also hamper your credit score. That is why the EMIs should be checked for their affordability before you actually avail the loan. There are online EMI calculators which help you calculate and adjust the EMI to suit your affordability. You should use the calculators and choose your EMIs wisely.
3. Applying for too many loans at once
Many times you believe that you can apply for multiple personal loans and then avail the best loan available in the market. This is a mistake. Every time you apply for a loan, it is reflected in your credit report. Too many loan applications hamper your credit score and also appear to be a red flag for lenders. Lenders wonder why there have been multiple applications and they might increase the interest rate of the loan making the loan costlier for you. You should, therefore, research the personal loan and then make a single application knowing that your application would be approved and you would get the loan easily.
4. Not comparing before availing a personal loan
Did you know how many lenders offer a personal loan? There are more than two dozen banks and financial institutions offering personal loans at attractive interest rates. The interest rates, however, vary across different lenders. To get a personal loan with then lowest interest rate, you should compare the available loans before applying. The online medium allows you an easy facility for comparing personal loans through loan aggregator websites. If you don’t compare you might end up with a loan having a higher interest rate than others.
These are the most common pitfalls which should be avoided at all costs when you apply for a personal loan.