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Personal Loans: 7 Mistakes You Should Avoid for Smooth Repayment

Do you need money for a short-term medical emergency or to chill out with family on a domestic vacation during a long weekend? In either case, a personal loan can be your go-to financial product. It is widely available and can provide you with quick access to cash, provided you can complete the loan processing formalities quickly.

However, while banks make the loan sanction and disbursement process smooth, you must ensure the repayment part is equally smooth. Let us discuss some personal loan mistakes you should avoid for smooth repayment.

1. Personal Loans: Opting for a Higher EMI Than You Can Afford to Pay

Most banks and NBFCs offer personal loans with a tenure ranging from 12 to 60 months. Some of them provide a maximum tenure beyond five years. Accordingly, you should choose a tenure based on which you can opt for an EMI amount you are comfortable paying from your monthly income.

Don’t make the mistake of opting for a lower tenure to finish the repayment faster. A lower tenure will result in a higher EMI, which you may or may not be able to pay comfortably. Choosing a higher EMI than what you can afford to pay can disturb your monthly budgeting. It can even increase your debt-to-income ratio (DTI). The DTI measures the percentage of monthly income going towards paying debt. A higher DTI can put a financial strain on managing your needs, wants, savings, and investments.

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2. Personal Loans: Opting for a Lower EMI With Higher Tenure Resulting in Higher Interest Payment

In the earlier section, we saw how opting for a higher EMI than what you can afford can lead to financial strain. At the same time, you should not opt for a longer tenure than required so that it results in a lower EMI. If you opt for the combination of longer tenure and lower EMI, the loan will go on for longer than it should. It will result in you paying a higher amount in the form of interest.

Hence, you should maintain a fine balance between the tenure and the EMI. The sweet spot lies in a tenure that is neither too short nor too long. Accordingly, the EMI should be such that it is neither too high to put a financial strain on you nor too low resulting in higher interest payment.

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3. Personal Loans: Not Comparing the Interest Rates and Other Loan Features Across Banks

When opting for a personal loan, several banks and NBFCs can provide it. Hence, there is a lot of competition among financial institutions, allowing you to choose the one that suits your requirements the best. You should compare personal loans from financial institutions on parameters such as:

a) The interest rate at which they are being offered

b) Whether there is a waiver or discount on the processing fees

c) The foreclosure charges and other fees

d) The eligibility and income requirements, tenure, amount, etc.

e) Any flexibility in the repayment

f) Customer service and any other features being offered

You can use aggregator apps or websites for comparison, as they provide all the information in one place. Spend some time on the comparison and choose the best deal.

Some financial institutions send you pre-approved offers from time to time. If you opt for these offers, the sanction and disbursement are usually faster, provided you can complete the documentation work quickly.

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4. Personal Loans: Not Going Through All the Charges Before Signing the Loan Agreement

Like any other loan, a personal loan also comes with a set of charges and fees. Some of these include the following.

Loan Processing Fee

It is usually a percentage of the loan amount. The borrower can pay the processing fee either upfront or have it deducted from the loan amount at the time of disbursement.

EMI Default Penalty

If you fail to pay the EMI on the scheduled date, the bank will charge a penalty.

Statement Fee

If you need a copy of any statement with details like your repayment schedule, outstanding balance, etc., you can submit a request to the financial institution. They will issue the physical copy of the statement by levying a fee. Requests for a duplicate copy of NOC or No Dues Certificate at the branch are also chargeable.

Foreclosure Fee

If you close the loan earlier than scheduled, the financial institution will levy a foreclosure fee. It is usually a percentage of the outstanding principal amount and may range from 1% to 4%. If you make a partial prepayment, there will be a fee levied for that also.

Statutory Fees

There may be some statutory fees like Stamp Duty charges, GST on various services and fees, etc.

You must ensure that you go through all the details of the various charges before signing the loan agreement. It helps you to be aware of all the charges involved in your loan and avoid any negative surprises after the loan is disbursed.

5. Personal Loans: Not Maintaining Adequate Balance in the EMI Repayment Account

You should always maintain a sufficient balance in your EMI repayment account to take care of the EMI. It is recommended that you should always maintain a spare balance for at least one EMI. Over and above this, you should transfer additional money for the upcoming EMI. The spare EMI helps you manage wherein you may not have sufficient funds in a particular month.

If you don’t maintain an adequate balance, your EMI will be returned/dishonoured. It will result in penalty charges levied to your loan account. Also, if your EMIs bounce, your account will be categorised as a non-performing account (NPA) after a specified duration. When the NPA is reported to the credit bureaus, it will result in your credit score taking a hit. It will also make it difficult for you to get loans in future.

Hence, you should always maintain an adequate balance in your EMI repayment account. It helps regular repayment of the loan and to avoid defaults, penalties, and a hit on the credit score.

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6. Personal Loans: Not Considering Prepayment Even After Having Surplus Funds

If you have accumulated sufficient surplus funds, you may consider using them for loan prepayment or foreclosure. It will help you become debt-free earlier than scheduled. If the interest you are paying on the loan is higher than the return you will earn on the surplus funds, proceeding with the prepayment or foreclosure may make sense. However, please note that prepayment and foreclosure involve a fee. Consider the fees before moving ahead.

7. Personal Loans: Applying for Multiple Loans at the Same Time

When you urgently need funds, you will try arranging them from all possible sources. However, don’t make the mistake of making multiple loan applications at the same time. When a financial institution checks your credit history and notices the multiple applications you have made in a short time, it may get the impression that you are credit-hungry. It may decline your loan application.

Hence, go with one financial institution at a time, and wait for their final decision before making the next application.

Avoid Personal Loan Mistakes for Smooth Repayment and Much-Needed Peace of Mind

Personal loans can help you fulfil your short-term requirements. However, you should choose an appropriate tenure and EMI, which is neither too high nor too low. Make sure you compare offers across banks and review all the charges before making a final decision. Maintain adequate funds in your loan repayment account, and consider prepayment/foreclosure if you have adequate surplus funds. Avoiding the mistakes discussed in this article can help you in the smooth repayment of the loan and give you much-needed peace of mind.

To read more about instant loans with True Balance, Click Here.

Enjoy additional perks of VISA, Forex Cash, travel insurance, mutual fund investment, and EPF balance tracking by visiting this link.

Apply now to get your L&T Finance Personal Loan by clicking here.

Apply now to get your lifetime free Credit Card by visiting this link.

By following these guidelines and being aware of the common mistakes, you can ensure a hassle-free personal loan experience and maintain your financial health.

The information provided in this blog by Techmin Consulting is for general informational purposes only. While we strive to ensure the accuracy of the content, we recommend consulting with financial professionals before making any decisions regarding personal loans. Techmin Consulting is not liable for any actions taken based on the information provided in this blog.

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