When you are facing a financial crunch, a personal loan can really come to your aid and with so many types of personal loans on offer, you are indeed spoilt for choice. But availing of such a loan as easy it seems with instant personal loans, can spell trouble if you are not cautious from the very start. Here are eight things not to do with unsecured personal loans at your disposal.
Do not apply for more than one loan
If you are faced with a financial crisis, you may be tempted to take more than one personal loan to make up for the deficit that you may be facing. But it is never financially prudent to take more than one personal loan. Firstly it is unsecured credit, which means that the interest rates that you are going to be paying on it are higher, and secondly it will impact the mix of credit thus bringing down your CIBIL score. Credit mix is one of the factors that have a bearing on one’s CIBIL score, therefore a credit profile that tilts towards unsecured loans will not augur well for you.
Do not apply for more than what you need
Taking a personal loan is like a double edged sword. While it may help you tide over whatever financial crisis you have at hand soon, it will also increase your debt burden. Do bear in mind that personal loans are costly with interest rates spanning in the range of 14-20%, therefore taking on a larger loan means that you have that you are taking on a costly loan. It is best to take a small personal loan and try to repay it as soon as possible even if you are eligible for a larger loan.
Do not take on credit without comparing
The advantage of living in the modern world is vast access to technology that make your job easier while doing research for your personal loan. There are many web aggregators these days that list out features benefits and interest rates on loan products in the same category, so it is imperative for you to compare personal loans before you make an informed choice, best applicable to your needs.
Do not go unprepared
Once you have made the choice of the lender that will give you access to easy personal loans, it is time for you to fill out the application form. Before doing so make sure that you are prepared as far as al the documentation needs are concerned. While doing your research you will have seen the eligibility criteria and documentation needed for loan application, so keep your official documents ready accordingly. If you are a doctor, CA or lawyer you may need to provide some certification of your credentials, so make sure you have that ready as well before you fill out the application form.
Do not sign without reading the fine print
Most lenders will harp on the convenience factor that they provide to their customers while lending. While all that may seem too good to be true, do not get carried away by the glib talk. Read the fine print and ask some hard questions about charges that are levied on you that you are not informed about upfront. Make sure all your questions are answered before you finally sign the agreement.
Do not take a loan for recreation
A personal loan should be used for a financial emergency that you are not prepared for and it is not advisable to use it for recreational purposes like going on a holiday or redecorating your home. While these are things that must be done, you are better of saving your money through SIPs with short term goals so that you do not end up increasing your debt burden for recreation or luxury.
Do not fall prey to greed or speculation
Got a stock market “tip” or heard of some scheme that will double or treble your capital? Do not fall prey to such speculations in the first place and never take a personal loan to fund these activities. Such speculation has disastrous impacts on the lives of people and can have dire consequences. Not to mention that you will find yourself in a debt trap because you will have no money to repay your loan. If investing and wealth creation is on your mind, you must do it through the equity route over the long term. If you do not have the required expertise, it is best that you opt for the mutual fund route instead.
Do not miss repayments
The first things that you should remember while taking on any kind of credit is that you must make timely repayments and it is no different for a personal loan. Make sure that your account is replenished ahead of the scheduled date of the EMI deduction from your account. Even a single missed payment will bring all your efforts to improve CIBIL score to a naught.
A personal loan can indeed come as a shot in the arm when you are facing trouble but you must keep the ground rules in mind to avoid falling into a debt trap.
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