5 Reasons Why a Personal Loan Can Go Wrong

Nov 12, 2022

Listen to 5 Reasons Why a Personal Loan Can Go Wrong

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A personal loan can be a great help in case of a financial emergency or to consolidate existing loans. It is one of the popular credit facilities as it can be availed without collateral and with minimum documentation. Besides, the personal loan process is much faster than any other type of loan. Since there is no restriction on the end-use of the loan amount, it can be opted for any of your financial requirements, such as renovating a home, buying an expensive smartphone, paying a child's school fees, throwing a party, paying hospital bills, and many more. However, you need to take certain precautions when availing of a personal loan; otherwise, it can go very wrong and bring you disappointment as it is one of the costliest loans available.

Here are 5 ways a personal loan can go wrong:

1. Missing out on a better deal:

With many banks and Non-Banking Financial Companies (NBFCs) offering personal loans, the market has become competitive. Before applying for a personal loan with the first lender you come across, it is a good idea to do thorough research and compare different lenders. A quick google search can help you find the lender that offers you an affordable interest rate and processing fee. Or, you can easily compare lenders on a single financial website that offers personal loan comparison. However, it is advisable to check the latest fees and charges on the lender's official website, as some financial websites might not be up to date. Doing thorough research will ensure you do not miss out on a better deal. However, make sure you only check or enquire for the loan with different lenders and do not apply with several lenders in a short duration. When you apply for a loan, the lender first checks your credit score. And multiple credit enquiries in a short duration can affect your credit score.

5 Reasons Why a Personal Loan Can Go Wrong
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2. Not reading the terms and conditions:

Many times individuals compare different lenders only on the basis of interest rates and processing fees. However, each personal loan comes with different features and terms & conditions that a borrower must be aware of before availing of a loan. Terms and conditions pertaining to pre-payment and foreclosure charges and a period after which it is permitted can significantly impact your finances. Some lenders charge considerably high pre-payment fees, so it may not make sense to opt for pre-payment even if you are financially capable of doing it. Apart from different fees and charges, there are many more clauses you will come to know after reading the fine print, such as credit insurance, repayment conditions, etc. Therefore, it is advisable to thoroughly read and compare the terms and conditions of different lenders before opting for a personal loan.

3. Not borrowing sufficient amount or over-borrowing:

A personal loan is generally availed in case of an emergency. Since many times, borrowers do not get sufficient time to assess their exact needs or check the loan eligibility with different lenders, many borrowers end up borrowing insufficient amounts or opt for the entire eligible amount without assessing their needs and end up over-borrowing. Borrowing an insufficient amount will not serve the purpose of opting for a loan, as you still will be worried about meeting your financial requirements. Similarly, over-borrowing can make loan repayment burdensome and stressful as the EMIs will be higher. Hence, before opting for a personal loan, assessing your exact money requirement is crucial to avoid under or over-borrowing.

4. Failing to make timely repayments:

While applying for a loan, it is necessary to assess your loan repayment capacity. Some borrowers opt for a loan just because they are eligible for the instant loan or borrow unnecessarily high amounts without checking their repayment capacity. If your income is insufficient to pay the loan EMIs or you already have a high debt-to-income ratio, then you should think twice before opting for any loan. If you are unable to pay the EMIs on the respective due dates, the lenders will charge you late payment fees. The unpaid EMIs and late payment fees can accumulate debt that becomes challenging to repay. Furthermore, not paying the EMI on or before the due date can negatively impact your credit score.

5. Borrowing for the wrong reasons:

A personal loan can be a 'good loan' when opted for a medical emergency or a genuine financial requirement like paying a child's tuition fees or debt consolidation. But it can be a 'bad loan' if opted to splurge on a vacation or buy an expensive smartphone. While good loans help you manage your finances better, bad loans can disturb your finances and make the repayments financially stressful. Frequently availing of personal loans to pay credit card debt and buy luxurious products and services can put you in a challenging situation of debt overhang wherein repayment of loans and credit card bills becomes burdensome, and you might not get a new loan due to a high debt-to-income ratio.

 

To conclude:

A personal loan opted to fulfil your financial requirements that cannot be postponed could be a great financial tool. However, a personal loan availed without thorough research, comparison, and assessment of the needs and repayment capacity can go very wrong. Therefore, it is crucial to be in control of the personal loan right from applying for it to repaying the complete dues.

 

Warm Regards,
Ketki Jadhav
Content Writer



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