Top 5 Mistakes to Avoid While Applying for a Personal Loan
Personal loans are loaded with numerous benefits, such as quick disbursal of funds, minimum documentation, no restriction on end-usage, no collateral requirement and so on. Nowadays, you can easily apply for personal loan online. These advantages make personal loans a preferred choice of credit during any unexpected financial emergency.
However, when applying for a personal loan, many borrowers make mistakes. This often leads to personal loan rejection.
Here are 5 such common mistakes that every borrower must avoid when applying for a personal loan:
- Not checking your credit report
Before you apply for a personal loan, checking your credit score and credit report is very important. That is because the lenders check your credit report to assess your creditworthiness. A person’s credit score represents their past credit repayment behaviour. These reports can easily be fetched from credit bureaus.
Generally, a credit score of over 750 is considered good for a personal loan. Some lenders follow credit risk pricing, under which they check the applicant’s credit score for deciding the personal loan interest rate. Not having a good credit score can often lead to rejection of a personal loan or a high interest rate on the loan.
The good news – you can always improve your credit score and get a personal loan at a low interest rate.
Always review your credit report before you submit a loan application to the lender. It can prevent any error from getting bypassed. Make sure you report the errors, if you find them, to the concerned bureau and lender for timely rectification.
- Submitting an application to too many lenders
Avoid this misstep if you want funds for any immediate requirement. In a desperate need of money, you might get lured to apply for a personal loan with too many lenders. This is wrong and must be avoided at any cost.
As soon as you submit your loan application directly to the lenders, they request for a credit report from credit bureaus to evaluate your creditworthiness. When a lender processes your loan application, a hard enquiry is made.
This hard enquiry reflects on your credit report and if too many hard enquiries are made by you, it could impact your credit score negatively. The lenders would assume that you are a credit hungry person and will hesitate to offer you a loan.
Instead of submitting direct loan applications to multiple lenders, you can visit online financial marketplaces to compare various loan offers by various lenders and choose the most suitable one based on your income, credit score, and other eligibility factors.
These marketplaces also provide you with the updated credit report by fetching it from the bureaus. These are considered as soft enquiries and do not impact your credit score.
- Not reading the fine print carefully
Some lenders might assure you a quick approval and high amount during the loan application. Don’t fall for such promises. Always go through the terms & conditions carefully. Ask about all the charges levied upfront. If you notice that certain terms are not favourable to you, clarify it with the lender. Read the loan agreement carefully before signing it. Never apply for a loan that doesn’t suit your budget and repayment capacity.
- Not comparing various lenders and options
Personal loan interest rates can vary anywhere between 10.50% and 24% per annum. There are many lenders available out there promising the best deal of your lifetime. Make sure you visit online financial marketplaces and compare the loan offers of all top lenders. Only after your complete satisfaction, choose the right loan product and lender.
You can compare multiple offers based on your credit score, income, eligibility criteria, interest rate, processing fee, prepayment charges, tenure, loan amount and other features and applicable terms & conditions of loans before zeroing in on a specific lender.
Do not ignore other loan options, such as secured personal loans (gold loan, loan against property, loan against deposits/shares/securities, home loan top up, etc.), instant personal loan app, P2P lending, and so on. Just like personal loans, these loans can also be used for any purpose and usually come with lower interest rate and longer tenure.
If you are an existing home loan borrower, you can opt for a top-up home loan, which is available at affordable interest rates and for tenure up to 30 years, depending on the remaining home loan tenure.
Similarly, individuals with sizeable long-term investments can opt for availing a loan against securities to meet their financial shortfalls at a lower interest rate without selling their securities.
- Not checking eligibility criteria & repayment capacity
Every lender has their own eligibility criteria for a personal loan. The age, income, employment, credit score, work experience, residential location, and other eligibility requirements may vary from lender to lender. Always check your eligibility criteria before applying for the loan, as it could help you improve your eligibility and can get you a better loan deal.
All lenders assess borrower’s repayment capacity by calculating their Fixed Obligation to Income Ratio (FOIR). FOIR is the proportion of your existing income utilised in debt repayments. Applicants with FOIR of 50% to 60% (including the EMI amount of the new loan) are usually preferred by lenders.
Make sure you choose a loan tenure whose corresponding EMIs keep your FOIR within this range. Individuals with lower repayment capacity can go for a longer repayment tenure to get a lower EMI amount. However, longer repayment tenure means higher overall interest outgo.
In addition to the above points, make sure you choose the right repayment tenure as per your income and budget, the right loan amount as per your requirement, and also look for the hidden charges associated with the loan. Avoiding these mistakes can always help you get a better personal loan offer.