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Common Mistakes To Avoid When Taking A Personal Loan

If you are thinking of taking a personal loan, you should be aware of certain common mistakes that people make when getting it. If you know what these mistakes are, you can avoid them when you are on the lookout of a personal loan.

1. Over stretching yourself: One of the most common mistakes that you can make is to overstretch your finances by taking a loan for a higher amount than you can afford. You must realize that you should borrow only as much as you can repay. The mistake of over stretching yourself might give you a bad credit history and the consequences can be even worse if you don't recover from falling into a debt trap. When seeking a personal loan, understand how much loan can you afford. Do you think you can handle the incremental burden of EMI payments on top of your day-to-day costs of living?


2. Taking a personal loan from different lenders: If you find that one lender offers you a lower amount than what you want, you may be tempted to take another personal loan from a different lender. Although, this can address your need to raise more cash than what any one lender is willing to offer you, but it also might put you in a financial condition where you are so over burdened that you may not be able to repay all or even a part of the different loans that you are liable for.
   

   Let us consider a stylized example. Harish applies for Rs. 1 lakh loan from X bank and they give him only a Rs. 50,000 loan based on his monthly income of Rs 12,000. However, Harish is desperate to get an additional Rs 50,000 loan. He then approaches Y bank for a new loan of this amount, without revealing that he has already taken a personal loan from X bank. Its important to recognize that there was a reason why the original bank did not give Harish the entire amount he was seeking - it was because his income was not sufficient. The bank took a view that Harish does not have the capacity to take a larger loan than what they sanctioned him.

   Harish thought he was being street smart by going to another lender, however in the long run he might just end up hurting himself because now he owes money to two lenders (Rs 50,000 from X and Rs 50,000 from Y), and that too an amount (total Rs 1 lakh) that at least one lender believes he does not have the capacity to pay back.

   Do you think he has the financial capacity to pay two EMIs on his current monthly salary of Rs 12,000?



3. Being unfamiliar of your credit worthiness: Are you familiar with your credit history? Your credit worthiness is one of the major criteria that a lender uses to decide your loan eligibility. It records any missed payments or irregular payment history that you have had in the past on any other type of loan. Therefore, you must understand that knowing and maintaining a good credit track record by ensuring regular payments on any of your loans, or credit cards is something you should do before you apply for a loan. If you know you have a bad track record, you might be exposing yourself to futher weakening your credit history if you go on applying for personal loans.


4. Hiding your financial obligations from the lender: Not letting your lender know about any other EMIs, or money you owe to someone is more like fooling yourself than the lender. Chances are if you have deliberately hidden these details from the lender, you are hiding your true financial condition and that you recognize that you might not be able to afford a personal loan but are so strapped for cash that you apply for a loan anyway. This hurts no one but you as in the medium run you will not be able to meet the repayments and then end up in default.


5. Not being familiar with terms before signing the documents: Sometimes we are so desperately in need of money that in our rush to take a loan, we don't stop to familiarize ourselves with the terms that we are signing up for. You should carefully read through the documents to understand your obligations and its consequences, so that you are not in for a surprise later. Some of these terms you must know when taking a personal loan are:
   
   
   • Fixed rate of interest is applicable: So even if rates are reduced by the RBI, your rate will remain fixed
   
   
   • You can prepay the loan amount only after six months of paying EMIs on the loan: Even if you have the money to pay your loan before it comes due, you might not have the flexibility of doing so, or can do so only if you pay a penalty
   
   
   • A 3% to 4% charge is applicable on the outstanding amount in case you want to foreclose the loan: If you settle your loan prematurely, then you will be liable to pay a fine to the lender. Clearly this is not the case if you take a loan from say a family or friend.
   
   

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