You are stuck in a situation where you need some cash to get out of. You have saved up some money to invest in something you feel would give you abundant returns but you are still short of capital. You are faced with a medical emergency and what you have saved up isn’t enough to save you so you need to top up.
I could go on and on, but these are the incidences that will have you opt for a personal loan from your bank or any other credit-giving financial institution.
Getting a personal loan to get you through these situations is an important financial move, but avoiding these seven mistakes is more important if you want to have a smooth repayment of that loan, before and after securing it.
Choose a moderate/balanced Equated Monthly Installment (EMI) you can afford
Different financial institutions give different tenures for personal loans, depending on how much the client is taking, and other factors. Your loan is supposed to be repaid in monthly installments (EMI) until it is completed.
You should pick a tenure that allows you to comfortably make the EMI amount from your monthly income. Choosing a lower tenure, say two years, for a big loan so you can repay it faster makes your EMI higher, which may in turn put you under unnecessary pressure, in case you don’t have enough to pay back on a certain month.
The reverse is true when you choose a lower EMI with a higher tenure. Choosing to pay lower monthly installments will result in a long loan tenure. A loan you would have paid off in three years ends up going on for, say, five years. This means more interest is paid on the personal loan. You should opt for a moderate EMI that won’t strain you. Not too high, not too low.
Compare the loan terms and conditions across financial institutions
Different financial institutions offer different loan terms and conditions due to competition as each institution tries to make their loan offers the most favorable.
This includes things like the amount that can be extended to you, interest rates, EMI, charges, tenures, customer care, requirements, and eligibility among others. You need to compare these from several institutions and go with the one that gives you a better deal.
Carry out proper due diligence on the charges the loan carries before signing the loan agreement
You should never sign a loan agreement before thoroughly going through the charges the loan carries. This helps you understand what you are getting yourself into, and assess whether you will be able to meet these charges.
You should pay attention to charges like the loan processing fee, the EMI default penalty, the statement fee, the foreclosure fee in case you finish repayment earlier than scheduled, and statutory fees like taxes the loan attracts.
Have enough balance in the EMI repayment account
At no time should you ever have insufficient balance in your EMI repayment account. Always maintain an adequate balance in your EMI repayment account that can cover an extra monthly installment. This will come in handy in case you run short of funds to pay back in a particular month. Proper planning gives you peace of mind and buys you time to prevent instances where the financial institution penalizes you and in extreme cases, categorizes your account as a non-performing account (NPA) which would affect your credit rating.
Consider prepayment when you have surplus funds
If you have sufficient surplus funds, consider prepayment or foreclosure. Foreclosure carries a charge but if this fee is lower than the interest you would pay for the full tenure, it is better to foreclose the loan earlier than scheduled.
Don’t apply for multiple loans at the same time
Applying for multiple loans at the same time makes you look desperate and credit-hungry in the eyes of the financial institution and your loan application(s) may be declined.
It is advisable to apply to one financial institution at a time and make the next loan application only after getting the final decision.
Conclusion
In today’s economy, a personal loan can be the bridge between where you are and where you want to be, dreams and reality. Most financial institutions have a smooth process for you to get the loan and you should do the things discussed above so your repayment journey is even smoother.
