Have you ever taken a personal loan and later felt stressed about repayments? You’re not alone. No doubt personal loans can be your lifesaver in emergencies, but mishandling them can trap you in a loop of major problems. Over-borrowing, ignoring rates, and missed payments worsen debt. In this blog, we’ll walk through common mistakes borrowers make and more importantly, how you can avoid them.
1. Borrowing Without Accessing Your Needs:
Just because you can take a personal loan does not mean you should take more than you need. This is one of the most common mistakes that a person makes– borrowing more than they actually need.
What many borrowers do is they apply for a maximum loan amount without even considering whether they will be able to repay it. This is where the debt trap comes into a loop.
What is the problem?
Overborrowing not only increases your debt burden but also escalates the pressure of repaying your loan. Which in turn often leads to default or delayed payments.
How to fix this problem?
Well, it is simple!
- Calculate the exact amount of funds you need before applying for your personal loan.
- Make sure you only borrow the amount that you genuinely need, not what your bank is willing to offer you.
- It is better to make a repayment plan in advance to determine whether you can afford it or not.
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2. Ignoring Interest Rates And Fees:
Approval of your personal loan is not everything; you need to evaluate the interest rates, processing fees, prepayment penalties, and late fees. Ignoring this major factor not only puts you in a jargon, but also costs you a hefty amount of money over your tenure.
Why is it a major problem?
If you think about it, you will understand how major it is. Even a small difference in interest rates can cost you thousands over the loan tenure. Furthermore, the hidden charges might inflate your repayment amount.
How can you fix this?
- Before you apply for your personal loan, make sure you have compared all the loan offers from different banks and NBFCs.
- Make sure to pay attention to the Annual Percentage Rate (APR), which includes fees.
- Do not hesitate to negotiate whenever possible, and remember to always read the fine print before signing.
3. Not Checking Your Credit Score:
A credit score is the most important thing that any lender sees before giving you a loan. Many borrowers often ignore their credit score and jump directly to applying for a personal loan. What happens next? An insufficient credit score leads to rejection or approval at a very high interest rate for their loan.
Why is not checking your credit score a problem?
Well, having been rejected multiple times for loan approvals negatively impacts your credit score further. Thus, it reduces your future borrowing ability.
How can you fix this problem?
- Check your credit score before applying.
- Make sure to clear all your outstanding debts and make timely repayments of your loan to improve your score.
- It is better to apply only to lenders whom you know are likely to approve your application based on your credit profile.
4. Taking multiple Loans At Once:
Some people have a habit of borrowing and taking multiple loans simultaneously. It is either to cover their increasing expenses or to repay the old debts; either way, this is not the right solution.
Why is having multiple loans at once a problem for a borrower?
When you have multiple loans, your EMI strains your monthly budget. This, in turn, raises your debt-to-income ratio, hence making repayment challenging.
How to fix this problem?
- You can consolidate your multiple loans into one single loan with lower interest rates.
- Focus on repaying all your existing loans before taking on new ones.
- Make sure you stick to a realistic budget, as it will help you cut unnecessary expenses.
5. Opting For Long-Term Loans:
You might think, having long-term loans with lower interest rates is pretty cool, you don’t have to pay much, and strain all your monthly income. Sorry to burst your bubble, but this is slightly not the case. Even if you are paying less interest, it still costs you more over time.
Why is it a problem?
It is because you end up paying higher interest, which in turn makes the loan quite expensive.
How to fix this?
- Make sure to choose the shortest tenure your income can comfortably afford.
- Use an EMI calculator and compare the total interest costs across different tenures.
- Whenever it is possible, just make part-prepayments; this will reduce your principal over time.
6. Not Reading The Loan Agreement:
Most of the borrowers for personal loans are just ignorant; all they do is believe what the bank representative is saying. That’s where the problem starts; skipping your loan agreement can lead to a loop of problems.
Why is it a problem?
If you ignore the agreement, you might miss all the crucial information. For instance, prepayment penalties, hidden fees, or conditions that could affect you later.
How to fix this?
- Make sure you have read all the loan documents and agreements carefully.
- Do not hesitate to ask questions to bank representatives about the unclear terms.
- Remember to keep a copy of the agreement for future reference.
7. Using Loan For Non-Essential Spending:
Your personal loan should only be reserved for your emergencies or essential financial needs. But what most people do is use this money for enjoying a summer vacation, shopping, or luxury.
Why is it a problem?
When you borrow money for non-essential expenses, it often leads to unnecessary debt and long-term financial strain.
How to fix this?
- You must have a clear understanding of the difference between your needs and wants.
- Avoid borrowing for personal lifestyle expenses.
- Build an emergency fund to cover non-urgent spending instead of relying on loans.
Conclusion:
Personal loans are quite useful if you are able to manage them carefully. Just make sure you are not over-borrowing, ignoring rates, or missing EMIs. Focus more on budgeting, timely payments, and debt consolidation when needed.
If you are disciplined and careful with your personal loan, you can prevent personal loan debt from overwhelming you. You might also unlock and move toward better financial security.