Taking a personal loan has become incredibly convenient in today’s digital era. With just a few clicks, salaried individuals can secure pre-approved personal loans from banks. Even those with a low credit score may find institutions willing to offer them a loan. However, despite its accessibility, a personal loan carries a high interest rate, making it essential to exercise caution.
Many borrowers make critical mistakes that lead to financial stress and regret later. Here, we outline the six most common mistakes people make when taking a personal loan and how to avoid them.
1. Not Comparing Personal Loan Offers
One of the biggest mistakes borrowers make is accepting the first loan offer they receive. Different banks and NBFCs (Non-Banking Financial Companies) provide varying interest rates, processing fees, and other benefits. Failing to compare offers can result in paying a higher interest rate or missing out on perks like waived processing fees or zero foreclosure charges.
How to Avoid This Mistake:
- Compare loan interest rates and terms across multiple lenders.
- Look for special offers like low processing fees or discounted interest rates.
- Check if the lender allows prepayment without hefty penalties.
- Use a loan comparison tool to identify the best deal.
2. Misusing the Personal Loan Amount
Since obtaining a personal loan is easy, some borrowers misuse the funds on non-essential expenditures. Using the loan amount for stock market trading, gambling, fantasy sports, or luxury shopping can be financially disastrous.
How to Avoid This Mistake:
- Use the loan strictly for essential financial needs, such as medical expenses, home repairs, or debt consolidation.
- Avoid spending on unnecessary travel, gadgets, or speculative investments.
- Plan your repayment strategy before taking the loan to avoid financial stress.
3. Borrowing More Than Needed
Just because a lender approves a higher loan amount doesn’t mean you should borrow more than required. Larger loans mean higher EMIs and increased interest payments, which can strain your monthly budget.
How to Avoid This Mistake:
- Determine the exact amount you need and borrow accordingly.
- Use a loan EMI calculator to assess repayment affordability.
- Keep the loan tenure short to minimize interest payments.
4. Defaulting on EMI Payments
Missing EMI (Equated Monthly Installment) payments leads to penalties, increased interest, and a drop in your credit score. If you fail to pay for 90 days, the lender may classify you as a defaulter, significantly impacting your future loan eligibility.
How to Avoid This Mistake:
- Set up auto-debit for timely EMI payments.
- Maintain a sufficient bank balance before the EMI due date.
- Prioritize loan repayment in your monthly budget.
- If facing financial issues, request a loan restructuring option.
5. Extending the Loan Tenure Unnecessarily
Many borrowers opt for a longer repayment tenure to reduce EMI amounts. While this lowers monthly payments, it significantly increases the total interest paid over time.
How to Avoid This Mistake:
- Choose the shortest tenure possible while keeping EMIs affordable.
- Avoid unnecessarily prolonging the repayment term to reduce total interest costs.
- If you receive a bonus or salary hike, consider prepaying part of the loan to reduce tenure.
6. Taking Multiple Personal Loans Simultaneously
Some individuals take multiple personal loans at once, leading to high EMI burdens and difficulty in managing repayments. Having multiple loans negatively impacts your credit score and increases the chances of financial distress.
How to Avoid This Mistake:
- Avoid taking a new loan until you’ve repaid your existing one.
- Consolidate multiple loans into a single loan to simplify repayment.
- Focus on clearing existing debt before considering additional loans.
Final Thoughts: Borrow Smart, Repay Wisely
A personal loan can be a lifesaver in emergencies, but only when used wisely. Avoid common pitfalls such as borrowing unnecessarily, missing EMIs, or extending tenure for too long. Make informed decisions by comparing lenders, setting a repayment plan, and ensuring financial discipline.
By following these best practices, you can manage personal loans efficiently and maintain a healthy financial future.
