According to a recent statistic, the total number of personal loan accounts grew by 2.35 crore in Q3 of CY 2019, registering a 48.1% YoY growth. It is mainly because personal loans have become the preferred credit options for individuals who do not wish to avail loan by mortgaging any collateral.
Moreover, it has no end-use restriction so it can be available to meet a variety of financial needs such as educational fees, consolidating your debts, or making a big-ticket purchase. However, in some cases, a loan application may get rejected due to some errors on your part.
Given below are some errors that you must avoid when you take a personal loan –
- Multiple loan applications –
Avoid applying for a loan with multiple lenders at the same time. It is because, when you take a personal loan, lenders pull up your credit history from credit bureaus to check your creditworthiness. It is known as a hard inquiry.
Multiple credit applications lead to several inquiries by lenders which are also recorded in your credit report. Too many hard enquiries can result in pulling down your credit score.
- Not checking your credit score –
A credit score is a numerical summarisation of a person’s credit report. It is a number between 300-900. Lenders refer to this score to ascertain a borrower’s repayment capacity before approving or denying their loan application.
Accordingly, a poor credit or CIBIL score can hurt your eligibility for a personal loan as lending institutions will consider that as your inability to manage credit properly. Additionally, lenders may approve loan applications to individuals with poor credit scores but charge them a high interest rate. Hence, you should know how you can avail a better interest rate for your personal loan.
Hence, you must know your credit score before you take a personal loan. It is also vital that you check your credit report before loan application because there may be some errors which are resulting in lowering your scores.
The factors that impact your CIBIL score are repayment history, credit utilisation, total debt, credit history, credit mix.
- Not fulfilling the eligibility criteria –
One of the mistakes to avoid while taking a loan is not checking the eligibility criteria. Lending institutions may reject your personal loan application if you do not meet the required eligibility criteria.
The basic eligibility criteria for a personal loan is as follows –
- Applicants should be a resident of India.
- They should be between the age of 23 to 55 years.
- Salaried borrowers should be employed at an MNC, public or private company.
- Self-employed individuals should have a business running for three years.
Application rejection can also hurt your credit score. Thus, before you take a personal loan to ensure that you satisfy all the eligibility parameters.
- Not knowing how much you can afford –
Before you take a personal loan, you should always be aware of your repayment capacity. If you fail to repay the loan on time, or make a late payment, you will have to pay late payment fees, which will lead you to a debt trap. So, if you have an idea about your repayment capacity or your debt to income ratio, you will be able to plan your personal loan EMI repayment better.
You can use online tools like a personal loan eligibility calculator to know the loan amount that you are eligible for based on your monthly income and debts. To use this calculator, you have to enter necessary information such as age, city of residence, monthly income, monthly obligations. Based on this information, the tool will calculate the loan amount you are eligible for. It will also enable you to understand if you will be able to afford the loan or not.
Apart from that, some NBFCs such as Bajaj Finserv also provide pre-approved offers to facilitate a smooth and quick application process. These offers can be availed on multiple financial products such as business loans, credit cards, personal loans, etc. You can check your pre-approved offers by entering only your name and phone number.
Aside from knowing the mistakes that you should avoid when applying for a personal loan, you should also be aware of other aspects. For instance, there are several tax benefits on a personal loan, which are available based on how you use the advance.