Top Mistakes to Avoid While Applying for a Personal Loan

You need ₹3,00,000 urgently for a family emergency. Without comparing options, you go ahead and apply for a quick personal loan. The bank approves it at a 16% annual interest rate for three years.

Sounds like a relief, right? But hold on. Do you realise this will cost you ₹79,680 in interest alone? Now, if you’d done your homework, another lender might have offered 12%. That would save you ₹17,760!

Personal loans are convenient, but they come with traps if you’re not careful. Since April 2022, more than half of microfinance loan applications in India have been rejected. Let’s explore the most common ones so you can avoid costly errors and secure the best deal.

Ignoring Credit Score

Your credit score isn’t just a number. It’s the first thing lenders check. Let’s say you have a credit score of 650. This score might get you a personal loan at 18% interest. But with a score of 750, you could land a rate as low as 11%.

For example, if you borrow ₹5,00,000 for 5 years:

That’s a difference of over ₹1,00,000 in interest payments. So, before applying for a quick personal loan, check your credit score. Improve it by paying bills on time and reducing existing debts.

Overlooking Loan Comparisons

Would you buy a smartphone without comparing prices? No, right? The same applies to loans. Banks and NBFCs have different offers. One might give you 12%, while another charges 15%. For a ₹2,00,000 loan over 2 years, this difference means:

• At 12% interest: EMI = ₹9,424; Total Interest = ₹26,176
• At 15% interest: EMI = ₹9,758; Total Interest = ₹34,192

This ₹8,016 saved could fund your next trip or gadget. Always compare options using online tools before committing.

Hidden Fees

Personal loans come with more than just interest. Many lenders sneak in charges like processing fees, prepayment penalties, or late fines. For instance:

• Processing Fee: Up to 2% of loan amount (₹5,000 for a ₹2,50,000 loan).
• Prepayment Penalty: ₹10,000 for early closure.

Ask your lender for a complete fee breakdown. Make sure these don’t outweigh the loan’s benefits.

Borrowing More Than Needed

Borrowing ₹5,00,000 when you need ₹3,50,000 seems tempting. But extra money isn’t free. For instance, the additional ₹1,50,000 at 14% for 4 years adds ₹48,012 in interest.

Take only what’s necessary. Use a personal loan calculator to know your exact EMI and total costs.

Not Checking the Repayment Plan

Your repayment plan impacts your financial stability. Many people rush into a loan without knowing the EMI. This leads to budget strain. For instance, if your monthly salary is ₹50,000:

• EMI of ₹12,000 for a ₹3,00,000 loan at 14% for 3 years means 24% of your income goes to EMIs.
• Add rent, bills, and savings, and you might face a crunch.

Choose a tenure and EMI that fits your income. Opt for flexible repayment plans if available.

Applying to Multiple Lenders at Once

This mistake can harm your credit score. Every application triggers a hard inquiry. More inquiries lower your score. Instead, shortlist 2-3 lenders, research them, and apply wisely.

Tips to Avoid These Costly Errors

• Build a solid credit score. Pay credit card bills on time.
• Use EMI calculators. Understand your loan costs before applying.
• Avoid over-borrowing. Stick to your actual need.
• Check processing fees. Factor these into your decision.
• Opt for online loans. These often offer better rates for quick personal loans.

Conclusion: Plan Smart for a Quick Personal Loan

Taking a personal loan isn’t just about getting money—it’s about making a smart financial decision. Avoid these common mistakes to save thousands. 

Did you know a single percentage point difference in interest could save you tens of thousands over a few years? Before you apply for a quick personal loan, compare wisely, calculate carefully, and plan ahead.

FAQs

1. Can I apply for a personal loan without a credit score?
   Yes, some lenders offer loans, but they may charge higher interest.
2. How much should I borrow?
   Only as much as you need to cover your expense.
3. Is it better to prepay a personal loan?
   Yes, if the prepayment charges are lower than the interest saved.
4. Does applying to multiple lenders hurt my credit score?
   Yes, multiple hard inquiries can reduce your score.