However, while the bank makes the loan sanction and disbursement part smooth, you should make sure the repayment part is smooth. Let us discuss some personal loan mistakes you should avoid for smooth repayment.
Also Read: Applying for a personal loan? Here are essential dos and don’ts you must keep in mind
Opting for a higher EMI than you can afford to pay
Most banks and NBFCs offer personal loans with a tenure ranging from 12 to 60 months. Some of them provide a maximum tenure beyond five years. Accordingly, you should choose a tenure based on which you can opt for an EMI amount you are comfortable paying from your monthly income.
Don’t make the mistake of opting for a lower tenure to finish the repayment faster. A lower tenure will result in a higher EMI, which you may or may not be able to pay comfortably. Choosing a higher EMI than what you can afford to pay can disturb your monthly budgeting. It can even increase your debt-to-income ratio (DTI). The DTI measures the percentage of monthly income going towards paying debt. A higher DTI can put a financial strain on managing your needs, wants, savings and investments.
Opting for a lower EMI with higher tenure resulting in higher interest payment
In the earlier section, we saw how opting for a higher EMI than what you can afford can lead to financial strain. At the same time, you should not opt for a longer tenure than required so that it results in a lower EMI. If you opt for the combination of longer tenure and lower EMI, the loan will go on for longer than it should. It will result in you paying a higher amount in the form of interest.
Hence, you should maintain a fine balance between the tenure and the EMI. The sweet spot lies in a tenure that is neither too short or too long. Accordingly, the EMI should be such that it is neither too high to put a financial strain on you nor too low resulting in higher interest payment.
Also Read: Personal loan: These are the lowest interest rates offered by top banks
Not comparing the interest rates and other loan features across banks
When opting for a personal loan, several banks and NBFCs can provide it. Hence, there is a lot of competition among the financial institutions, allowing you to choose the one that suits your requirements the best. You should compare personal loans from financial institutions on parameters such as:
a) The interest rate at which they are being offered
b) Whether there is a waiver or discount on the processing fees
c) The foreclosure charges and other fees
d) The eligibility and income requirements, tenure, amount, etc.
e) Any flexibility in the repayment
f) Customer service and any other features being offered
You can use aggregator apps or websites for comparison, as they provide all the information in one place. Spend some time on the comparison and choose the best deal.
Some financial institutions send you pre-approved offers from time to time. If you opt for these offers, the sanction and disbursement are usually faster, provided you can complete the documentation work quickly.
Not going through all the charges before signing the loan agreement
Like any other loan, a personal loan also comes with a set of charges and fees. Some of these include the following.
a) Loan processing fee: It is usually a percentage of the loan amount. The borrower can pay the processing fee either upfront or have it deducted from the loan amount at the time of disbursement.
b) EMI default penalty: If you fail to pay the EMI on the scheduled date, the bank will charge a penalty.
c) Statement fee: If you need a copy of any statement with details like your repayment schedule, outstanding balance, etc., you can submit a request to the financial institution. They will issue the physical copy of the statement by levying a fee. Requests for a duplicate copy of NOC or No Dues Certificate at the branch are also chargeable.
d) Foreclosure fee: If you close the loan earlier than scheduled, the financial institution will levy a foreclosure fee. It is usually a percentage of the outstanding principal amount and may range from 1% to 4%. If you make a partial prepayment, there will be a fee levied for that also.
e) Statutory fees: There may be some statutory fees like Stamp Duty charges, GST on various services and fees, etc.
You must ensure that you go through all the details of the various charges before signing the loan agreement. It helps you to be aware of all the charges involved in your loan and avoid any negative surprises after the loan is disbursed.
Also Read: How to calculate interest on a personal loan? Here’s a guide to help you understand
Not maintaining adequate balance in the EMI repayment account
You should always maintain a sufficient balance in your EMI repayment account to take care of the EMI. It is recommended that you should always maintain a spare balance for at least one EMI. Over and above this, you should transfer additional money for the upcoming EMI. The spare EMI helps you manage wherein you may not have sufficient funds in a particular month.
If you don’t maintain an adequate balance, your EMI will be returned/dishonoured. It will result in penalty charges levied to your loan account. Also, if your EMIs bounce, your account will be categorised as a non-performing account (NPA) after a specified duration. When the NPA is reported to the credit bureaus, it will result in your credit score taking a hit. It will also make it difficult for you to get loans in future.
Hence, you should always maintain an adequate balance in your EMI repayment account. It helps regular repayment of the loan and to avoid defaults, penalties, and a hit on the credit score.
Not considering prepayment even after having surplus funds
If you have accumulated sufficient surplus funds, you may consider using them for loan prepayment or foreclosure. It will help you become debt-free earlier than scheduled. If the interest you are paying on the loan is higher than the return you will earn on the surplus funds, proceeding with the
prepayment or foreclosure may make sense. However, please note that prepayment and foreclosure involve a fee. Consider the fees before moving ahead.
Also Read: Ensure financial stability before opting for zero-interest EMIs, says Raj Khosla of MyMoneyMantra
Applying for multiple loans at the same time
When you urgently need funds, you will try arranging them from all possible sources. However, don’t make the mistake of making multiple loan applications at the same time. When a financial institution checks your credit history and notices the multiple applications you have made in a short time, it may get the impression that you are credit-hungry. It may decline your loan application.
Hence, go with one financial institution at a time, and wait for their final decision before making the next application.
Avoid personal loan mistakes for smooth repayment and much-needed peace of mind: Personal loans can help you fulfil your short-term requirements. However, you should choose an appropriate tenure and EMI, which is neither too high or low. Make sure you compare across banks and review all the charges before making a final decision. Maintain adequate funds in your loan repayment account, and consider prepayment/foreclosure if you have adequate surplus funds. Avoiding the mistakes discussed in this article can help you in the smooth repayment of the loan and give you much-needed peace of mind.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.
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Published: 12 Jun 2024, 03:48 PM IST