Applying for a Personal Loan? Key Do’s And Don’ts You Must Know
Personal loans have become a popular solution for managing various financial needs, from covering unexpected medical expenses to consolidating debts or funding higher education. Moreover, with the rise of digital lending platforms, applying for an instant* personal loan has become easier than ever, especially in times of urgency.
However, missteps in the personal loan application process can lead to unfavourable repayment terms, such as higher interest rates, or even rejections. To ensure a stress-free and successful application, it’s crucial to understand the key dos and don’ts of personal loans.
From checking eligibility requirements to using tools like a personal loan EMI calculator for effective repayment planning, there are several steps you can take to make informed decisions and avoid potential pitfalls.
This article will guide you through everything you need to know before applying, including key practices to follow and common mistakes to avoid when taking out a personal loan.
What You Need To Know Before Applying
Before applying for a personal loan, here are some critical factors to consider:
● Eligibility Criteria: Each lender has specific eligibility requirements, including age, income, work experience, and credit score. Ensuring you meet these criteria beforehand can help you avoid application rejections.
● Loan Amount: Carefully assess how much you need to borrow. Borrowing more than necessary can result in unnecessary repayment strain while borrowing less might leave you short of funds.
● Interest Rates: Even a slight difference in interest rates can have a significant impact on your EMIs (Equated Monthly Instalments) and total repayment amount. Beyond interest rates, it is crucial to consider additional charges, such as processing fees, prepayment charges, and late payment penalties, which contribute to the total cost of the loan.
● Repayment Tenure: Choose a loan tenure that aligns with your financial situation. A shorter tenure generally involves higher EMIs but reduces the overall interest costs. Conversely, a longer tenure can reduce the monthly repayment burden but increase the total interest costs over the life of the loan.
● Using a Personal Loan EMI Calculator: An EMI calculator helps estimate your monthly repayment amount based on the principal, interest rate, and tenure. This tool provides a clear picture of your repayment obligations, aiding in better financial planning. Many reputed lenders, such as SMFG India Credit, offer an online personal loan EMI calculator to help you make informed borrowing decisions. By utilizing this tool, borrowers can assess the feasibility of taking a loan, manage their budget efficiently, and avoid any financial strain.
5 Do's While Applying for a Personal Loan
1. Do Thorough Research
Before applying for a personal loan, compare lenders, interest rates, repayment terms, and associated fees and charges. Understanding your financial needs and repayment capacity will help you choose the most suitable loan option.
2. Check Your Financial Situation
Evaluate your income, existing debts, and monthly essential expenses before applying for a loan. Ideally, your EMIs should not exceed 40–50% of your monthly income. It’s also prudent to maintain an emergency fund to handle unexpected expenses without risking missing out on loan repayments.
3. Maintain a High Credit Score
A strong credit score, preferably 750 and above, improves your chances of securing a loan with favourable interest rates. Check your credit report before applying and address any inaccuracies or areas that need improvement. Paying bills on time, reducing existing debts, and keeping the credit utilisation ratio low can help boost your score.
4. Verify Loan Terms Carefully
Always read the loan agreement thoroughly to understand interest rates, repayment schedules, penalties for late payments or prepayments, and potential hidden fees. Clarify any unclear terms with the lender to avoid unwelcome surprises later.
5. Check The Lender’s Credibility
Choose a lender with a solid reputation and transparent practices. Read customer reviews and verify whether the lender is registered with the Reserve Bank of India (RBI). Opting for well-known and trusted financial institutions will lead to a safer and smoother borrowing experience.
5 Don’ts While Applying for a Personal Loan
1. Don’t Overborrow
Borrow only the amount you genuinely need. Taking on excessive debt can strain your finances and increase the risk of falling into a debt trap.
2. Don’t Ignore Your Credit Score
A poor credit score can result in higher interest rates, stricter terms, or even loan rejection. Additionally, credit score requirements can vary by lender, so it’s important to review the criteria of your preferred lender before starting the application process.
3. Don’t Rush The Decision
Avoid making impulsive decisions when selecting a personal loan offer. Take the time to compare different lenders and terms to verify that the loan aligns with your financial goals and repayment capacity.
4. Don’t Overlook the Debt-to-Income (DTI) Ratio
Ensure that your Debt-to-Income (DTI) ratio remains low; a high ratio can indicate financial strain and deter lenders from approving your loan or providing advantageous terms. To enhance your ratio, address existing debts before applying for a loan by verifying the lender's DTI ratio threshold and taking measures to reduce debt. Making impactful changes, like settling credit card balances, can substantially improve your DTI ratio and overall loan eligibility.
5. Avoid Unverified Lenders
Applying for a loan from unregulated or lesser-known lenders can expose you to hidden charges, exorbitantly high interest rates, or even scams. Always verify the lender’s credentials and RBI registration to ensure transparency and trustworthiness.
Conclusion
Applying for a personal loan can be straightforward if you take the right steps and avoid the common pitfalls discussed in this article. Start by researching lenders, understanding their respective eligibility criteria, and using tools like a personal loan EMI calculator for informed financial planning.
While personal loans provide the flexibility to address various needs, responsible borrowing and timely repayments are essential for maintaining long-term financial stability and a healthy credit history.
*T&C apply. Please note that final approval, loan terms, and disbursement process may vary based on lender policies and borrower’s eligibility.
Disclaimer: This article is published in association with SMFG IndiaCredit and not created by TNM Editorial.