There is always a clamour for loans considering the need for money to fulfil certain needs. These can include the need for a home loan to buy a property or for the construction of a house, personal loans to pay off certain expenses like lingering credit card debt, medical expenses or other needs or other kinds of loans depending on need and immediacy of requirements.
With so many banks and non-banking financial institutions offering loans at lucrative interest rates and attractive discounts, many find it difficult to choose between the right kinds of loans or verify the efficacy of the lending companies. This can result in many people, including you, making mistakes while borrowing loans.
The common mistakes that many borrowers make are:
- Lack of planning: This is the biggest mistake that you may make while seeking loans. Working without a budget always spells doom. Not being aware of how much money would be spent on loan repayment before taking a loan can cause you to feel overburdened financially or cripple your financial condition in the long run. Plan your budget well in advance to evaluate your options before deciding to take a loan.
- Exaggerating the ability to repay: It is important to be true to yourself. Overestimating your ability to repay a loan can cause you to apply for a higher loan amount. Your ability to get rid of any liability depends on how much you earn. We may need higher loans as we expand our horizons in life. However, your earnings must also commensurate accordingly to allow you to take a large loan and repay the same within the stipulated period.
- Ignoring the effect on credit score: Your credit score has a lot to do with how frequently you seek credit and your ability to repay the loan on time. Having a good credit score is essential to healthy finances in the long run. Having a credit score above 750 eases your ability to procure unsecured loans. Leading fintech companies are apprehensive of interested borrowers having below-average credit scores. So, do not make the mistake of applying for too many loans and lowering your credit score in the process.
- Applying to one lender only: Many people like you tend to apply for loans at the nearest banks or the financial institutions they are banking with. This can cause you to miss out on interesting loan offers like low-interest rates, extended loan tenure facilities, or discount rates to first-time borrowers. Comparing lenders and their interest rates is the first step that many avoid. This lackadaisical approach has resulted in many repaying an amount much higher than the loan sought. It is important to check out all the options before applying for a loan.
- Ignore processing fees or hidden charges: News of fintech platforms charging their customers under the pretext of providing the best services is not uncommon. While checking for loan availability, look for details of the hidden costs in the lender’s prospectus. Ask your loan provider to give you details of the EMIs that you have to pay every month to understand the loan processing fees added to skim more money from you so that you can either bargain regarding the same or look for better and cheaper options.
- Ignoring loan tenure options: Not many borrowers associate much importance with deciding the right loan tenure. A short tenure implies higher EMIs every month while borrowers choosing to repay the loan over a long tenure do not have to shell out much money each month. However, the latter also implies greater cash outflow, in the long run, owing to the compounding effect on the loan amount taken. To ensure smooth loan repayment, it is important to opt for a suitable tenue that is achievable and does not extend too much burden on your financial condition. Deciding the loan tenure based on future growth assumptions will result in an unwanted financial burden.
- Not checking repayment options: The fintech market has grown considerably in the past couple of years. New fintech platforms have different repayment procedures and lesser processes involved. This allows you to take loans without any hassle. However, this can also translate to lesser repayment options that you must be aware of before opting for the loan amount. You can avoid this costly mistake by seeking loans only from fintech institutions enjoying great credibility in the market.
- Ignoring prepayment options: Imagine earning a windfall that allows you to get rid of a part of the loan amount through prepayment. However, not all fintech platforms may allow their customers to prepay the loan amount sought. If you are looking forward to being debt-free soon, check with your lenders if they allow their customers to prepay the loan and at what cost. Check for the prepayment charges and associated terms and conditions too, though not all lenders may charge you for prepaying the loan taken.
Many people ignore reading the fine print that ultimately brings them to loggerhead with the lending companies. Making the mistake of not reading the terms and conditions refrains you from benefiting from a good bargain. While no one wants to go so deep into the details, it is important that you read the offer documents carefully before signing on the dotted line. Too much urgency on the part of the fintech company can be a possible red flag that you must not ignore.
A hassle-free financial journey starts with taking stock of your mistakes and being careful at every step. Taking a loan is not a bad option till you are able to repay the same without inviting any unwarranted financial hurdles.