Generally, when you decide to obtain financial assistance to meet your financial needs, a personal loan is the first thing that will pop into your mind. However, selecting which loan to receive depends on the purpose for which the funding is received. Since personal loans are easily accessible, collateral-free, require minimum documentation, and have no conditions for their utilization, it is the most popular form of a credit facility. In this blog, we will point out five common mistakes you should avoid while applying for a personal loan.
1. Applying to Multiple Lenders
The applications directly impact your credit score, and multiple applications reduce your chance of getting through successfully. The credit rating agencies consider your other credit facilities to calculate your credit score. When you submit your application to multiple lenders, your report will be reflected with the credit bureau. Hence, your information will be considering other requests, too, and based on that, and your credit score will be affected. The creditworthiness is highly dependent on the various credit facilities you select. Therefore, it is advisable not to apply to multiple lenders at a time.
2. Overlooking Your Repayment Capacity
While personal loans are the most popular form of securing financial assistance in emergencies, they should also be well considered to check your repayment capacity before applying for the loan. The repayment capacity is calculated by computing the Fixed Obligation to Income Ratio (FOIR), which means how many portions of your income are consumed by the debt repayments. Hence, if you find it hard to repay in a shorter period, you can opt for long-term loans with lower EMIs. Nevertheless, long-term loans with lower EMIs often turn out to be the costliest loan option. It is also advisable to consider the personal loan eligibility criteria before applying.
3. Lack of Awareness about the Credit Report
Credit reports impact your loan application and affect the personal loan interest rates. The lenders consider such statements to assess the loan repayment capacity and how actively you will make repayments. A desirable credit score may help you obtain a personal loan with lower interest rates. A lower credit score may sometimes result in a high-interest payout for the loan. There are chances of your loan request getting rejected if the credit score is not up to the lenders’ benchmark.
4. Limiting Your Selection to a Few Lenders
When you want to apply for a personal loan, you will come across various lenders offering such assistance with different features and terms and conditions. While few lenders will keep interest rates in a particular range, others may offer a lower interest rate. However, limiting your selection only to those lenders who offer the lowest interest rates is not the right way of obtaining the best personal loan. It is always imperative to run a comparative analysis on different criteria to decide which lender offers the loan that suits your requirements.
5. Ignoring to Select the Right Tenor
While long-term loans result in higher interest payouts, short-term loans may cash out your savings instantly. Considering your loan repayment capacity, selecting too short or too long a tenor for the loan can become a hassle for you. Hence, choosing the right tenor for the loan is crucial while applying for the loan.
To err is human, but proper research is always possible to avoid them. If you keep these common mistakes in your mind while applying for the loan, you will fetch the best suitable loan. You can check your EMI amount by using a Personal Loan EMI Calculator.