Taking out a personal loan is regarded as one of the most convenient solutions to deal with financial woes. The loan has minimum qualifying requirements, and one can utilise it for a variety of purposes, making it an excellent alternative for borrowers. However, before you apply for a personal loan, you should be aware of the various dos and don’ts that come with this type of loan.
Personal Loan Do’s
Do’s1 – Check your Credit Reports
A credit report is a record of all your previous and existing debts to date. It shows your repayment history and informs lenders whether you have defaulted on any past loans. If you have paid all your EMIs and have cleared all debts on time, the lender is more likely to provide you with a low-interest personal loan.
The Covid-19 induced pandemic has impacted the earning potential of almost every middle-class person. As a result of the impact on earnings, EMI payments have been delayed. Given this, do not forget to check your credit reports whenever you applying for a personal loan.
Do’s 2- Review and Compare the APR
Annual Percentage Rate (APR) in the context of a personal loan refers to the annual cost of borrowing. APR includes interest rate along with the other costs such as processing fee, prepayment fees, and so on. Though such fees are smaller, any major difference in the same might vary the cost of borrowing significantly from one borrower to another. Therefore, before you apply for a personal loan, it is recommended that you compare the costs of borrowing from different lenders and analyse your debt burden properly before making a decision.
Do’s 3- Consider the Consequences of Credit Score
You don’t need a high income to acquire a personal loan. But, if you have a bad credit score, you may have to work harder to obtain one. Poor credit scores can be caused by a variety of factors, some of which are listed below.
- If you are a first-time borrower, your credit score will show poor numbers.
- Any previous loan defaults or skipped EMI of current dues also lowers your credit score.
- If you are shouldered with multiple debts, your credit score will be lower.
In the event that you have a poor credit score, the lender might ask you to add a guarantor or co-applicant to your loan application. They may also request that you put up any assets as collateral. Bear in mind that in the event of default, the lender has an option to utilise the pledged assets to recover their losses. The co-applicant, on the other hand, is jointly liable for the debt repayment.
Do’s 4 – Consider every Aspect of Your Loan
Read every single line of your loan agreement before signing the same. In case you have trouble understanding any point, don’t hesitate to ask the lender’s representative. Some of the key aspects of the personal loan agreement that you can’t skip reading are outlined below.
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Repayment Tenure:
Your repayment term has a direct connection to your personal loan interest component. The longer the tenure, the more will be the interest burden. As a result, you must carefully consider whether you desire a lower EMI or a lower interest burden.
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Fees and Charges:
Before signing your application, keep an eye on the various loan-related expenses, such as rescheduling fees, processing fees, and a few others.
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Foreclosure Clause:
Don’t forget to go through the foreclosure clause written on the agreement. Check to see if your lender allows prepayment, and if so, review the foreclosure charges.
Do’s 5 – Apply with Existing Lender
If you have ever taken out a loan before, consider applying for a personal loan with your current or previous lender. Lending institutions always want to retain their loyal customers. They might also provide you with an appealing loan offer. Some lenders also offer pre-qualified loans to their existing customers. Another benefit of applying with an existing lender is that you might not have to furnish any documents to obtain funds from them. This is because existing lenders already have your details and documents saved in their database.
Personal Loan Don’ts
In order to make your loan application go smoothly or to make your repayment easier, here are some of the things that you must avoid while you applying for a personal loan eligibility.
Don’ts 1 – Avoid Accepting the First Offer Immediately
The majority of applicants seek a personal loan while they are facing financial difficulties. As a result, they don’t conduct any research into their possibilities and simply accept the first offer presented to them. Doing so is regarded as one of the biggest blunders.
Every financial institution has a different credit evaluation approach. For some, income is the most important criterion, while for others, the credit score is the most important aspect. The different credit appraisal methods play a significant role in deciding your loan approval chances and interest rate.
Don’ts 2 – Avoid taking the Entire Amount You are Qualified for
Personal loans, if not used wisely, will only add to your financial woes. Don’t overborrow if you have a pre-qualified loan offer or if you are eligible for a loan amount that is greater than your actual needs. Overborrowing entails making additional payments to offset the interest component leading to an unnecessary financial burden in the long run.
Don’ts 3 – Never Skip Payments
Once the lender approves you for a personal loan, prioritize paying your monthly debt instalments on time. When you miss payments, you risk a number of disadvantages, including late EMI penalties, a bad impact on your credit score, a reduced chance of being approved for a loan in the future, and so on. In case of multiple skipped EMIs, the lender might take legal action against you.
Don’ts 4 – Avoid Multiple Applications
When you applying for a personal loan, make sure you wait for responses from the first two or three lenders before moving on to the next. When you apply to many lenders at once, you will be perceived as a hungry borrower, which will reduce your chances of being approved.
Bottom Line:
Now that you are aware of the do’s and don’ts of personal loans, make sure you follow them every time you apply for a personal loan.