7 personal loan mistakes to avoid for better financial health

Personal loans can be a useful financial tool that can help borrowers in meeting expenses such as home renovation, education, debt consolidation, medical emergencies, etc. Still, misuse or mismanagement of loans can quickly trap you in debt and hamper your financial integrity. That is why to make sure that your personal loan works for you, not against you, avoid these seven mistakes:

I. Borrowing more than needed

Taking a higher loan than required increases your repayment burden. It can also complicate the overall repayment plan, and the total interest outgo can escalate immensely. That is why, as a sensible practice, do not make personal loan decisions based on emotions but on rational thinking. Only avail of the loans that are required and not loans that can be afforded.

II. Ignoring the interest rate

There are borrowers who get trapped in unwanted loans based on the advice of loan agents. Avoid this behaviour altogether. Never go ahead with any particular loan product without comparing rates properly. Even a minor difference in the interest costs can significantly impact total repayment costs over the years.

III. Not reading the fine print

Every personal loan comes with a detailed brochure that defines the terms, conditions, applicable interest rates, processing fees, tenure, repayment deadlines, etc. It becomes essential to read the fine print and acknowledge the fact that hidden costs, prepayment penalties, and processing charges can add to the costs of the loan if overlooked.

IV. Using the loan for non-essentials

Personal loans should be used only to meet life difficulties and crunch situations. Credit in any form should never be used for leisurely expenses such as vacations, luxury shopping, or non-essential lifestyle upgrades. Personal loans should be used only to meet unavoidable expenses and productive requirements.

V. Skipping or delaying EMIs

To put it simply, you should not avail a personal loan if you cannot make repayments on time. Missing out on repayments can attract penalties. It can hamper your credit score and damage your credit profile. Not only this, in exceptional cases, it can also have legal consequences.

VI. Not planning repayments

Entering a loan without a clear repayment strategy can disturb your monthly budget and lead to defaults. A default on a personal loan can really complicate things for a borrower. It can cause unintended consequences such as forced recoveries, confiscation of collateral if pledged, along with other strict remedial measures to meet the shortfall.

VII. Taking multiple personal loans at once

This is also not a very credit-healthy idea. You should not take out or try to stack up personal loans, which can spiral into a debt trap. This becomes even more vital if repayment of pending loans consumes most of your income.

In conclusion, a personal loan can definitely provide financial relief to borrowers. Still, reckless borrowing and irresponsible spending of borrowed funds can easily backfire. Lending institutions look down upon applicants who apply for many loans or credit cards within a short span of time, as it is a reflection of credit hunger.

That is why personal loans should be taken only after proper due diligence and discussion with a certified financial advisor, as these loans come with risks such as the possibility of high debt buildup, serious implications for credit profiles, processing fees, hidden charges and other associated factors.

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