No matter how affluent one may be, the need to borrow money emerges for almost everyone at some point in his or her life.

 

Therefore, it is very crucial to exercise caution and understand all the terms and conditions before applying for a loan, as the commitment to repay is for a long-term and any kind of mistake may not only have an adverse effect on your financial health but also risks losing your asset pledged with the lender. Through this article, we intend our readers be cognizant of mistakes ones should avoid while applying for loans.

Taking a loan more than needed: The golden rule of smart borrowing is what the older generation has been emphasizing the whole time: Don’t live beyond your means. When applying for a loan, it can be tempting to go overboard and borrow more than completely necessary, but a smart borrower should never bite off more than he can chew. When you take out a loan, you not only have to repay the money you borrow, but also the interest. That is the money that you can put up for savings or to spend on other things. Excessive borrowing may have serious consequences on your financial health and make your life burdensome. If one becomes habitual to borrowing and take out new loans to cover existing debts, their financial position becomes unmanageable, their problems can spiral out of control. Borrowing money is a huge financial step, and it can help you or hurt you—depending on how you manage it. Hence, try to be financially disciplined and borrow only as much as required, slashing your need to borrow down to the basics.

Not comparing loan facilities offered by different banks: It’s human nature to follow other’s footsteps rather than making a decision based on own calculations. A large number of people ignore comparing products offered by different banks and simply settle upon for a loan just because a friend has chosen one or blindly trusting attractive advertisements. Low rates, no application fees and superfast approvals-loan aggregators are doing everything they can to attract new customer, but don’t borrow just because the interest rate is attractive or quick approval is promised. There are many more attributes one should compare before making a final decision. Devoting time to compare loans can aid you save a lot of money in the long run. Therefore, you must visit various banks to know about their offerings as well as discuss with your friends, relatives and colleagues to get an idea of various options and facilities they are availing to fetch the best loan deal according to your needs.

 

Opting for longer tenure: Borrowers are inclined to prefer longer tenure while applying for loan, thinking they will have lesser financial burden. It’s absolutely correct that when you spread the loan over numerous years, you’ll pay lower EMIs. But this misconceived artifice may end up paying more money as interest. In some cases, people may be compelled to take a long-term loan, like young people with low incomes may not be able to afford a short tenure but when you have money at your disposal always opt for the shortest term available to maximize the benefits of your loan.

Borrowing to splurge or invest: One of the basic rules of investing is never use borrowed money to invest. Utmost-secure investments like fixed deposits and bonds won’t be able to match the rate of interest you pay on the loan and investments that offer higher returns, such as equities, are too volatile. If the markets drop, you will not only suffer massive losses but will be ambushed with hefty EMIs as well.
 

Likewise, abstain from taking a loan for superfluous spending. Nowadays, increasing loan advertisements for international holiday packages, sparkling diamond jewelries or latest mobiles are flooding, trying to convince how easy it is to borrow money. By flaunting low interest rates and simple application processes it tempts you into getting your hands-on money but such wants are better fulfilled by saving up. It’s not wise to take a personal loan for splurging into your extravagant fascinations. If you desire go on a holiday, own the latest gadgets or indulge in some luxury shopping, start saving now.

Neglecting the fine print on the agreement: Loan documents don’t make for light reading. Paragraph after paragraph of legalese printed in a small font can be stodgy. Most of us blindly sign at the points where we are told to for any such seemingly boring documents but not reading the fine print for such an agreement could lead to unpleasant surprises. There might be a provider giving an attractive interest rate and a longer tenure but charging a higher penalty for early repayment or more processing fee. Here are some of the typical fees or hidden costs that aren’t always openly-discussed when you get a loan:

  • Loan processing fee: A loan processing fee is a fee charged to a potential borrower for processing an application for a loan. Different BFIs charges different rates so bargain for the minimum.
  • Prepayment penalty: This is a fee that the loan processor will charge you if you pay the loan off early. It’s a strategy lenders use to get the full amount of interest. Make sure your offer letter has no prepayment penalty.
  • Late payment fee: Missing an EMI or delaying a payment not only will hurt your credit report, but most lenders will charge you a fee if you delay payment even by a day. Sometimes you can get this waived as a one-time courtesy.
     

Taking a loan is an enormous step financially, and shouldn’t be taken casually. Once you make the decision to borrow money, make sure you do your homework sincerely before applying for a loan to avoid any financial mishaps.