5 personal loan mistakes that can push you into long-term debt

With retail borrowing rising across India and digital lending becoming more accessible, borrowing smart has never been more important. Misusing a personal loan can lead to long-term debt, high interest costs, and a drop in your credit score. To help you stay financially healthy, here are five common personal loan mistakes you should avoid.

1. Do not borrow more than you need

With the advancement of technology in lending, the entire approval process of personal loans has become smooth, provided the applicant meets the essential eligibility requirements. Still, as a sensible borrower, it is best to consider your requirements first. How much loan do you need?

You should answer this question after proper due diligence and consultation with a certified financial advisor. Post the same comparison of interest rates across various NBFCs and banking institutions. You can also make the most of the personal loan EMI calculators provided on the websites of leading lending institutions. This is the most reasonable approach to proceed with a new loan. A disciplined borrowing approach will help you maintain a healthy credit profile.

2. Avoid using loans for discretionary spending

Personal loans should be applied for only to meet essential requirements such as emergency medical needs, surgeries, education costs, or home renovation. Such loans should not be spent on luxury holidays, expensive watches, clothes or avoidable lifestyle upgrades.

Understanding the essence of borrowing is key here; one should focus on limiting expenses on non-essential products and services. Such products and services rarely generate returns, but can still trigger a cycle of debt, i.e., repeated borrowing.

3. Do not miss or delay EMIs

Even before applying for a personal loan, you should sit down and devise a repayment plan. Be clear: missing personal loan EMIs, home loan EMIs, or credit card bills can attract fines and penalties, and may also result in legal action against you.

To protect your financial health and address such difficulties proactively, enable auto-debit on personal loan EMIs. Always ensure that you have a healthy buffer in your bank account to cover debt expenses and track repayment dates diligently. A strong repayment history is going to boost your eligibility for future loans and credit cards.

4. Avoid taking multiple loans at once

Whenever you submit a fresh credit card or personal loan application, your credit profile is thoroughly checked by the lending institution. This check is performed to ensure that the borrower is capable of repaying the borrowed funds. Furthermore, all such checks are registered on the individual's credit profile as ‘hard checks.'

That is why you should not submit numerous loan or credit applications. This results in numerous hard checks and also increases the borrower's debt-to-income ratio. It is a clear signal of financial stress to lending institutions.

5. Do not ignore prepayment opportunities

Lending institutions also provide borrowers with the opportunity for part-payment with minimal charges. To ensure that you quickly clear any dues, you should use your bonuses, tax refunds or surplus savings after understanding the guidelines of prepayment from your respective lending institution. The focus should be on reducing principal early to bring down interest costs. That is why it is critical to review lender policies before signing the personal loan agreement.

In conclusion, a well-planned personal loan can go a long way to assist borrowers with funds during financial difficulties. Still, how one uses the availed funds defines the future trajectory of the individual. Misuse of personal loans can result in debt buildups and hit credit scores badly, whereas sensible usage can boost one’s overall credit profile.

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