You should exercise caution while applying for a loan as any kind of mistake may affect your financial health.
The need to borrow money arises for almost everyone at some stage of their life. The purpose of borrowing, however, varied it may be for all, retains the underlying principle of any loan. It is thus wise to exercise caution and be well versed with the procedures before applying for a loan as the commitment to repay is for a long-term and any kind of mistake may affect your financial health.
In this article, we discuss five mistakes that should be avoided while taking a loan.
Not Comparing Various Loans
Devoting a little time to compare loans can help you save a lot of money in the long run. Let us understand this with an example. Mr. ‘A’ is a successful businessman and is careful while buying any appliance or item for his office. He is well conversant with all competing brands and compares them before making a final choice. However, he fails to give the same treatment to his Home Loan application and blindly follows his agent’s suggestion. He could have bagged a cheaper loan had he compared the offerings from other banks. A large number of people are like him and ignore comparing products while looking for a loan. Therefore, you must:
- Visit various banks to know about the offerings. Discuss with your friends and colleagues to get an idea of various options and facilities they are availing for their loan
- Do an online comparison of various products to fetch the best loan deal according to your needs
Being Ignorant About Credit Score
All banks are required to verify the CIBIL Score of the loan applicants. A bad CIBIL score could lead to rejection or higher cost of the loan while a good score helps you secure a loan easily, and could even result in the lower interest rate. So the first thing before applying for a loan is to check your CIBIL score and take steps to keep it healthy. If your credit score is 750 or above, then your chances of fetching a good loan deal are high and you also have the advantage of bargaining for a lower rate of interest with the bank. If your score is lower than 750, then you are the mercy of the bank on interest rates.
Borrowing Beyond Your Capacity
You should always consider your income levels while taking a loan and borrow the amount which you can easily repay. Before granting the loan, banks determine the amount eligible to you by looking at your income and existing liabilities. They, however, do not take into account your existing expenses. You are the best judge of your existing expenses and so do not take a loan which results in higher EMI and put you in a financial distress. It is best to take into account all your monthly expense plus the expected EMI and compare it with your monthly income. If it is higher or too close to your monthly income, then consider a cheaper option for the thing you want to buy.
Failing To Opt For Shorter Tenure
It’s true that when you spread the loan over many years, you’ll pay lower EMIs. But this may result in paying more money as interest. When applying for any loan, always choose the shortest term available to maximise the benefits of your loan.
Not Reading The Agreement Properly
While going for a loan, borrowers only focus on the interest rates and tend to ignore other important aspects. They also choose to ignore going through the agreement clauses, which could result in missing out on critical terms and conditions. Do read the agreement thoroughly before signing. If you do not understand anything written in the document make sure you get all the answers before you sign. You must consider the following points:
- Term of the loan?
- Will it be a secured or unsecured loan?
- Is the interest rate fixed or variable?
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