Personal Loans are a great a way to tide over your short term financial need as it requires relatively less documentation, quickly disbursed and doesn’t require any collateral. The interest rates these days offered by banks and financial institutions are also very competitive especially for borrowers with high credit score. But there are certain vital things that one should keep in mind regarding personal loans:
- Avoid Applying for loans with too many banks: This
is a very important point as not many people are aware of this fact. You
need money urgently and you might be tempted to apply with multiple banks in
case your desired bank doesn’t approve your application. With advent of online
banking, it has become very easy to apply for personal
loan online with several banks. This is a bad strategy in this case. Every
time you apply for a loan with a bank or any financial institution, it will
check your Credit Score on CIBIL. Now with each credit score check your overall
credit score comes down a little bit. Now if some four - five banks check your
Credit Score at the same time it’ll hamper your score in a meaningful way, which
in turn will pose a problem in getting your loan sanctioned. Also lower credit
score result in higher personal loan interest
- Avoid taking large loan amount: Just because personal loans are structured in such a way that you don’t have to discuss the reasons for taking one, it doesn’t mean you try to get as much as you can. Take only as much as you can afford to repay. Taking a loan amount more than you can afford to repay on time will put you in a debt trap.
- Avoid long tenured personal loans: A Personal Loan, however simple and easy to avail, is a debt and you must repay it as soon as possible. A long tenured EMI has relatively higher interest component and thus defeats the purpose of solving your money problem. Unless absolutely required and part of the plan, keep your loan tenure as short as you can.
- Avoid taking too many Personal Loans: This is again a very important point that most people overlook and hence make a mistake. Don’t take more than one personal loan even if you have not been given the amount you originally needed. Try to make up the amount by borrowing it from somewhere else such as family or friend. By doing this you will save yourself from suffocating under a heap of debt and the issues around managing all the loans.
- Avoid missing your EMIs at all cost: Once
a bank has given you a Loan, it expects timely repayments (EMIs) as well. Make
sure you do not skip any of your EMI payments by the due date. Missing an EMI
payment affects your Credit Score and from the next time the banks will
hesitate to give you fresh loans in the future.
- Avoid using loan money for speculative
activities: Once the money is in your bank account you might be
tempted to invest that in the stock market or other speculative activities in
search of quick return. But what if the bet turned otherwise? Things
will pretty much go downhill from there. For investing in speculative
activities use money that is set aside specifically for this purpose and avoid
using a personal loan here.
- Avoid using the loan money for
discretionary spends: Because
a personal loan does not require the borrower to use it for a specific purpose,
you might get tempted to use it for discretionary spending such as shopping,
going on a holiday etc. This is highly warranted and one should only use
personal loan money for valid financial emergencies.