5 Common Mistakes You Should Avoid When Applying for Personal Loans

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Personal loan is a preferred credit option for financing both your planned expenses and financial exigencies as it comes with no-end usage restriction, zero collateral, minimal documentation and faster loan disbursals. While personal loans are highly accessible, lack of awareness about these loans and/or negligence while applying for the loan may lead to the applicant making some mistakes, which can lead to loan rejection or selection of sub-optimal loans.

Here are the five common mistakes that prospective borrowers should avoid when applying for personal loans.

Exceeding your EMI/NMI Ratio

Personal loan lenders usually use the EMI/NMI ratio to assess their loan applicants’ repayment capacity. This ratio calculates the percentage of an individual’s net monthly income (NMI) that goes into repaying his debt obligations. Banks/NBFCs usually prefer sanctioning personal loans of applicants whose debt obligations, including the proposed personal loan’s EMI, are restricted to 50-55% of their net monthly income. Those exceeding this limit are less likely to get personal loan approval. Therefore, prospective borrowers should use online personal loan EMI calculators to determine the optimum repayment tenure that keeps their EMI/NMI ratio below the aforementioned limit. Applicants whose EMI/NMI ratio exceeds the 50-55% limit can opt for higher personal loan tenures. However, opting for longer loan tenures will increase the interest cost burden.

Not Exploring other Personal Loan Offers

The personal loan interest rates may vary widely from one lender to another due to their credit assessment processes and the underlying risk factors. Therefore, prospective borrowers should compare the personal loan offers from multiple lenders before making the final loan application. Loan applicants should first approach their existing lender(s) with whom they maintain deposit or lending relationships. Many lenders provide pre-approved personal loan offers, with instant/same-day disbursal and minimal documentation, to their existing customers having strong credit profiles. Several lenders also offer preferential interest rates on personal loans to their existing customers. For example, customers of HDFC Bank can contact the lender to enquire about the existing Personal Loan Interest Rates and if they are eligible for any interest rate concessions. Moreover, the personal loan offers from your existing bank/NBFC can be used as a benchmark to compare the personal loan schemes offered by other lenders. Visit online financial marketplaces to compare the personal loan interest rates and other features offered by multiple lenders, based on your credit profile, before making the final personal loan application.

Applying with Multiple Personal Loan Lenders within Short Durations

When a bank/NBFC receives a loan application, it fetches the loan applicant’s credit report from the credit bureaus to determine his creditworthiness. Such lender-initiated requests for credit reports are considered as hard inquiries by the credit bureaus. The bureaus deduct a few points from the applicant’s credit score for every hard inquiry. Therefore, having multiple hard inquiries within a short duration may cause a significant dip in your credit score, thereby reducing your chances of availing personal loans or other credit options in the near future. To avoid this, applicants should visit online financial marketplaces to compare the personal loan schemes of multiple lenders before selecting the most suitable personal loan offer. Any such credit report requests raised through online marketplaces are considered as soft inquiries, which have no impact on your credit score.

Ignoring Prepayment/Foreclosure Charges and Related Terms

Lenders can levy penalty charges of up to 5% of the outstanding loan amount from borrowers who prepay or foreclose their personal loans. Note, that the RBI has barred lenders from levying prepayment/foreclosure charges on floating interest rate personal loans. However, no such restrictions are applicable for personal loans with fixed interest rates. Some lenders also restrict their fixed-rate personal loan borrowers from prepaying/foreclosing their personal loans before the payment of a predetermined number of EMIs. Therefore, prospective borrowers should compare the prepayment/foreclosure charges and related terms of multiple lenders while comparing their personal loan offers.

Not Considering other Personal Loan Alternatives

Apart from personal loans, secured loan products like loan against property, loan against securities, top-up home loans and gold loans have no end-usage restriction and hence, can be considered as alternatives to personal loans. Furthermore, banks/NBFCs usually set lower interest rates for such secured loans as compared to the rates offered on personal loans. For example, existing home loan borrowers can avail top-up facility, with the interest rates usually the same as or a bit higher than its underlying home loan, thus making it a cheaper alternative compared to personal loans.

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