Personal loans are an excellent option to handle financial emergencies that cannot be funded from your savings. These unsecured loans are quite useful, easily available, and do not require any kind of collateral or security. However, there are a few things to consider when taking a personal loan.
The personal loan banks sanction these loans only after ensuring that the borrower has the ability as well as the willingness to repay the borrowed amount. Here are some mistakes that you should avoid if planning to take a personal loan.
Tip 1: Ignoring or Not Checking Your Credit Score
Your credit score is the main factor considered by lenders. The credit score reflects your creditworthiness or track record in the payment of any kind of dues including credit card bills and previous loans. A good credit score indicates that you not only repay your loans or pay your bills but also adhere to the due dates thereby assuring the lender that their money will be safe. In contrast, a low credit score may reflect some delays in repayments or some pending dues and so is viewed negatively by the lenders.
While a low credit score does not mean that your personal loan application will get rejected, it means a higher interest rate may be charged. So do not make the mistake of ignoring your credit score.
Tip 2: Not Checking Your Eligibility
The best bank for a personal loan will always specify the eligibility criteria for providing personal loans. So do ensure that you are aware of the eligibility norms and meet all the criteria before applying. You can always use the personal loan eligibility calculator to check whether you are eligible to get a personal loan or not.
Tip 3: Getting Lured by Low Interest Loan Offers
A major mistake made by personal loan aspirants is to get lured by attractive advertisements offering quick loans at extremely low interest rates. And in this process, they ignore reading the fine print or the other terms and conditions associated with it. A lender may charge an exceedingly high processing fee or include high penalties for prepayment of the loan or any other charges that may actually increase the cost of the personal loan.
Tip 4: Applying to Several Lenders
Applying to several lenders at the same time may appear to be a good option. But it can do more harm than good. Multiple applications can harm your credit score besides sending a signal to the lenders that you are desperately in need of money. A wiser option is to apply to one or two lenders whose eligibility criteria you meet.
Tip 5: Relying Too Much on Loans
Personal loans are useful but come at a cost in the form of interest rates and other fees. Relying too much on this mode of funding or making it a habit to take a personal loan at high interest can impact your credit score and the ability to get loans when you really need them. So, apply for a personal loan only for funding an urgent need and not for expenses that can be avoided or postponed.
Avoiding these mistakes will help you use the personal loan funding option to meet your emergency fund requirements.