Because personal loans are unsecured, banks and NBFCs charge relatively higher interest rates on them. Therefore, thorough research is crucial before taking out a loan.
When someone takes a personal loan for the first time, the biggest mistake they make is not understanding the interest rate options. Loans are typically available with two types of interest rates: fixed and reducing. Many people take out loans without understanding the difference between the two and later end up paying higher EMIs.
In a fixed interest rate, the EMI remains the same throughout the loan tenure, and interest is applied to the entire loan amount. On the other hand, in a reducing rate, interest is calculated on the outstanding principal after each EMI payment, which causes the interest to decrease over time. This reduces the total payment. However, first-time borrowers often overlook this technicality.
Mistake of taking a loan from a wrong lender
Nowadays, loans are easily available through mobile apps, but this convenience sometimes puts people in trouble. Many mobile loan app companies charge very high interest, in some cases reaching 40 to 50 percent annually. Such apps certainly provide quick money on easy terms, but later repayment becomes difficult. It is better to take a loan from a trusted bank or registered NBFC.
Hasty decisions without comparing interest rates
Many new borrowers hastily take a loan from whichever bank or institution offers it first. They don't consider the interest rates offered by other banks or institutions. Whereas, a little research can sometimes lead to a 2-3 percent cheaper interest rate, which can significantly reduce the overall burden of the loan.
Not knowing about hidden charges
Personal loans involve not only interest but also several other charges, such as processing fees, insurance charges, or other administrative charges. Often, a first-time borrower doesn't understand these hidden charges and has to pay them later. Some banks also make insurance mandatory with the loan, although it is not necessary. Therefore, it is essential to have complete information about all the charges before taking a loan.
Ignoring pre-payment terms
Many times after taking a loan, when a person's financial situation improves, they consider repaying the loan early. But then they find out that they will be charged a pre-payment fee, or that the bank does not even offer this facility. Due to the lack of this information beforehand, the customer has to face problems. Therefore, it is necessary to find out at the time of taking the loan whether there will be any charges for repaying the loan early.
Not planning EMI payments
Many people take out loans but do not make any plans for paying EMIs. The result is that after a few months, they start facing difficulties in paying the installments and default on the loan. This damages their credit score and causes problems in obtaining loans or credit cards in the future. In such cases, it is necessary to do an EMI calculation before taking a loan and plan the installment payments, keeping in mind their income and expenses.
Important points for first-time borrowers
Taking a personal loan in India has become easier than before, but with this ease, many risks of fraud or expensive debt have also increased. People taking out a loan for the first time need to be the most cautious because their inexperience can be taken advantage of.
If a person avoids these six mistakes, they will not only find it easier to get a loan, but they will also have no trouble repaying it. In today's time, where the demand for personal loans is increasing rapidly, the right steps with the right information are the proof of prudence.
