Zee Exclusive: 5 mistakes to avoid while taking a personal loan

A personal loan can bring you the much needed financial relief if used wisely, hence understand everything about the personal loan process to avoid pitfalls.

Personal loans are easy to get and can come in handy during financial needs. These loans are easier and faster to obtain than any other type of loan to help you get by in an emergency. You can obtain a personal loan without the use of any collateral. However, while considering a personal loan, it is prudent to avoid the some major mistakes:

Here are 5 mistakes to avoid while taking a personal loan

· Borrowing loan beyond your repayment capacity: A smart rule while borrowing a loan is to live within your means. The corpus of the loan such be such that you will be able to return on time. One rule of thumb is that the EMIs of personal loan should not exceed 10 percent of your net monthly income.

· Not comparing lenders: If you're getting a personal loan, ensure that you're getting the most acceptable deal that is available in the market. After all, borrowing money always has a cost, and the lower your total loan cost, the easier it will be to get out of debt.

· Applying for too many personal loans: This is a misstep when you want funds for your immediate needs. In a desperate situation where you need instant money, you might tend to apply for personal loan from too many lenders. The lender makes a hard inquiry while processing your loan application, which will appear on your credit report. If there are too many hard inquiries, your credit score may suffer.

· Not reading the fine print: Check the fine print on the personal loan you're considering taking. Make sure you're aware of any hidden expenses. Some lenders, for example, impose prepayment penalties. This means, if you wanted to pay off your loan early, you would end up paying more than you would for a similar loan without a prepayment fee.

· Not establishing a balance between your tenure and EMIs: You can lower your EMI by taking out a loan with a longer term. While this may reduce your monthly repayment and lessen your financial strain, remember to do so only if you have genuine difficulty paying off the loan, not just because you can.

A personal loan can bring you the much needed financial relief if used wisely. Therefore, understand everything about the personal loan process to avoid pitfalls. The key takeaway is to plan, prepare and consider your options with a clear mind so that you can set yourself up for financial success.

(Expert comments by Vivek Veda, Co-Founder & CFO, KreditBee and Co-Founder, FACE – Fintech Association for Consumer Empowerment)