Taking out a personal loan is often a major life moment. After all, it can help you finance big purchases or make it possible to achieve numerous financial goals. But if you make mistakes in any of the steps in the process, you can find yourself paying more in interest than necessary or even getting rejected by lenders. Even a few small errors could mean paying more in the long run – a financial burden no one wants to bear. And sometimes, borrowers tend to make such personal loan mistakes without even realising it.
From not comparing different options to overborrowing, here are some common yet costly missteps that could potentially affect your personal loan interest rate.
- Not checking credit score beforehand
Credit score serves as a metric that many lenders use to determine whether you are eligible to get a loan and under what conditions.
A high credit score not only demonstrates your trustworthiness as a borrower but also increases the chances of getting a low personal loan interest rate significantly. Alternatively, if your credit score drops because of low credit utilisation or payment delays, lenders may choose not to lend money or may offer loan terms with high-interest rates.
To improve your credit score and demonstrate your financial responsibility, it is advisable to start paying bills on time, avoiding late payments, getting up-to-date on all past-due accounts, and paying down revolving account balances.
- Switching jobs or changing careers too often
Switching jobs or changing careers too frequently can create an impression of instability and uncertainty in the eyes of lenders, causing them to offer significantly higher interest rates than they would have offered if your employment and career had been more stable. Unexpected career changes cannot always be avoided, but it’s best to try to build some stability in the workplace.
- Overborrowing and not using a personal loan EMI calculator
When you borrow money, you are responsible for repaying the loan plus interest. So, before clicking the personal loan apply button, it is essential that you request the amount only after determining your repayment capacity. If you overborrow, you may end up paying more in interest, which could not only put a strain on your finances but may also lead to difficulties repaying your loan. And if you miss or delay your loan payments, it may damage your credit score. This can affect your personal loan eligibility and make it difficult to qualify for loans in the future.
To determine how much you can afford to borrow, review your monthly income and expenses. This will help you figure out the amount you save monthly after fulfilling other financial obligations. After that, use a personal loan EMI calculator to figure out your monthly repayments based on the loan amount, tenure and interest rate of the lender you choose. Use this information to compare multiple lenders and find the one with an affordable personal loan rate and favourable tenure.
The bottom line
Besides the above-mentioned mistakes, other missteps can also affect your personal loan interest rates, including – applying for multiple loans, keeping a high debt-to-income ratio, not reading the fine print, taking a loan for a higher tenure than necessary, overlooking fees and penalties, and most importantly, applying for a loan without thorough research. As a responsible borrower, it is important to be mindful of these mistakes before you apply for a personal loan.