The Dos & Dont's while taking an Instant Personal Loan

Establishing credit worth is fundamental for everyone who aspires to have a great lifestyle. It not only opens the door to great financial opportunities but also comes in handy during emergencies. An Instant Personal loan is one such instrument that can be used for diverse financial goals such as home improvements, education expenses, weddings, travel, and major purchases. Additionally, an instant personal loan also helps you build or repair your credit score when managed responsibly, opening doors to better borrowing opportunities in the future.

However, it’s crucial to assess factors like loan offer details and your own financial situation carefully before choosing a personal loan that aligns with your needs and budget. Here are a few dos and don’ts you can consider while selecting a personal loan.

Things You Should Keep In Mind While Getting an Instant Personal Loan

1. Assess Your Financial Situation

Assessing your finances before applying for a personal loan is crucial for borrowing responsibly. Determine the amount you need and your ability to repay the loan, factoring in your income, expenses, and existing debts. This will help you understand how much EMI you can afford and what the ideal repayment should be.

2. Check Your Credit Score

Your credit score plays a significant role in the loan approval procedure and in determining the interest rates. Before applying for personal loans, ensure that you check your credit report, review it for errors, and take steps to improve your score if needed. The higher your credit score, the better your chances of getting the loan approved at favorable repayment terms.

3. Compare the Loan Options

Check if you already have any pre-approved loan offers, but don’t finalize it until you have compared all your options. Shop around and compare loan offers from multiple lenders, including banks, credit unions, online lenders, and peer-to-peer platforms. Compare interest rates, fees, and terms to find the most favorable option.

4. Read the Fine Print

Carefully read the loan agreement, including all terms and conditions. Pay attention to interest rates, fees, repayment schedules, and any prepayment penalties before making a decision.

5. Borrow Only What You Need

Avoid borrowing more than necessary. While it might be tempting to take out a larger loan, it can lead to higher interest costs and financial stress. What would also help is to take a loan with a clear purpose, so you know exactly how much you need and how to plan your repayments.

6. Build a Strong Application

Prepare a comprehensive loan application that includes proof of income, employment history, and any assets. A strong application can improve your chances of loan approval and get you better loan terms.

Suggested Read: How to Calculate EMI for Your Personal Loan

Things to Avoid While Choosing an Instant Personal Loan

1. Don't Apply for Multiple Loans Simultaneously

Each time you apply for a personal loan, the lender conducts a hard credit inquiry, which can slightly lower your credit score. Multiple hard inquiries in a short period can significantly reduce your credit score, making it harder to qualify for loans or credit cards in the future. Therefore, applying for multiple loans at once can negatively impact your credit score and make you appear credit-hungry to lenders.

2. Don't Ignore Fees

Additional fees, beyond the interest rate, can significantly impact the total cost of your loan. By examining these fees, you can accurately estimate how much the loan will cost you over its entire term. Be aware of all fees associated with the loan, including origination fees, prepayment penalties, and late payment fees.

3. Avoid Dependency On Loans

Using personal loans as a regular source of funds can lead to a cycle of debt. It’s best to address underlying financial issues and build an emergency fund to avoid dependency on loans.

4. Don’t Overlook Your Budget

Before taking out a personal loan, create a budget to ensure you can comfortably make the monthly loan payments. Avoid overextending yourself financially, as this can lead to missed payments and late fees.

5. Don't Default on Payments

Avoid missing loan payments, as this can harm your credit score and lead to additional late fees or penalties. Set up reminders or automatic payments to stay on track. Defaulting on your credit card or loan payments can harm your credit score for the long term, lead to additional fees, and even result in legal action by the lender.

6. Don't Co-Sign Without Thinking It Through

Co-signing a loan for someone else means you are equally responsible for repaying the debt if they can’t. Only co-sign if you fully trust the borrower and are prepared to take on the financial responsibility.

FAQs

1. How do banks determine personal loan amounts?

Banks and financial institutions determine the personal loan amount for an applicant based on several factors to assess the individual’s creditworthiness and ability to repay the loan. They look at the applicant’s credit score, income, Debt to Income ratio, and employment history, among other things, to decide the loan amount.

2. Will I get a personal loan if my credit score is low?

Getting a personal loan with a low credit score can be challenging. You can look at options other than banks, such as non-banking financial entities and peer-to-peer lending platforms that might be willing to offer you a personal loan despite your low credit score. However, it may come with a high interest rate and a shorter tenure.

3. What documents are needed for a personal loan?

While applying for an instant personal loan, you should have these documents handy: Salary slips, Bank statements, ID proof such as PAN card/Aadhar card/Passport, address proof, etc.

4. What is the best credit score when applying for personal loans?

A credit score of 700 & above is considered good when applying for a personal loan. Having a good credit score can help you qualify for personal loans with lower interest rates and flexible repayment terms.