What not to do with a personal loan: 6 key pitfalls to avoid | Mint

These days, personal loans are one of the easiest loans to get. With a wider adoption of digitisation, you can apply for a personal loan and get the amount disbursed on the same day. Pre-approved personal loan offers make the application and disbursement process quick.

However, when personal loans are available easily, you must take them when you have a real need for money and use it judiciously. You must follow certain dos and don’ts with personal loans. In this article, we will understand some things you should not do with a personal loan.

Taking a personal loan without comparing offers from multiple lenders

There is a lot of competition among banks and NBFCs to get customers for their various loans, including personal loans. Financial institutions come out with various offers to woo customers for their personal loans. Some of these offers include a discount or complete waiver of processing fees, a lower interest rate, waiver of foreclosure fees, gift vouchers, etc.

To know about the various offers available and choose the best one, you must compare the personal loan features and benefits from various financial institutions. You can use the website or app of various online aggregators. These aggregators can provide a tabular comparison of the features and benefits of personal loans from various financial institutions.

Based on the comparison, you can shortlist 2-3 financial institutions and take the discussion forward with them. It will help you get the best deal that suits your requirements.

Action point:Always compare personal loan offers from multiple lenders and get the best deal.

Making unnecessary purchases with the personal loan amount

Because of the ease with which personal loans are available, people grab them, and some end up misusing them. You should not use personal loan money for speculative activities like share trading, fantasy sports games, betting, gambling, etc. There is a high probability of losing money with these activities.

You should avoid making unnecessary purchases with the personal loan money. For example, your mobile phone may be working fine. But just because a personal loan is available easily, you need not take it and purchase a new mobile with it. The same applies to other gadgets or consumer durables you possess and are working fine.

Some people plan a vacation or prepone a planned vacation just because a personal loan is available. If you can save money over the next few months and plan the vacation with your own money, there is no point in rushing with a personal loan.

Action point:Take a personal loan only when needed and use the money judiciously.

Taking more amount than required

Financial institutions will send you personal loan offers for a specified amount. They determine the loan amount based on your credit score, credit report, credit utilisation ratio, monthly income, debt-to-income (DTI) ratio, etc. However, it is not necessary for you to avail of the personal loan amount offered.

You must assess your need and inform the financial institution about your loan amount requirement. For example, suppose you are availing a personal loan for a purpose like a medical procedure, home renovation, marriage, buying a consumer durable, own or kid’s education, etc. In that case, you will have a fair idea of the amount required. So, you must inform the financial institution accordingly on the personal loan amount requirement.

If you take a personal loan for a higher amount than required, you will pay more interest than required. Also, the loan tenure will go on for longer than required.

Action point:Always first assess your needs and decide the personal loan amount accordingly.

Delaying or defaulting on the personal loan EMI

When you take a personal loan or any other loan, you must make sure you pay the EMIs before or by the due date. Delaying any personal loan EMI payment will result in financial penalties from the financial institution. It will also lead to a sharp drop in your credit score.

If an EMI is delayed by over 90 days, the bank will categorise you as a defaulter. The default status will be reflected in your credit report and stay there for years. It will make it difficult for you to get new loans or credit cards in future.

Action point:Always pay your personal loan EMI before or by the due date. If possible, keep one EMI as a buffer. It will help tide over the situation if you face financial difficulty in a particular month.

Extending the loan tenure unnecessarily

At times, you may want to restructure your personal loan repayments. It will involve extending the loan tenure with a lower EMI. Extending the loan tenure will result in your loan running longer than scheduled. It will result in you paying a higher interest amount over the entire loan tenure. You should exercise this option only if you are facing financial difficulty.

Action point:Follow the original EMI schedule if you can pay the EMI comfortably. It will help you finish the loan repayment on time.

Taking multiple personal loans

Some people take multiple personal loans for small requirements. It results in multiple EMI payments on different dates. Managing them can be a challenge. Multiple EMIs can stretch the monthly budget also. If possible, wait for some time to finish paying off the existing personal loan EMIs before taking a new loan.

Action point:Take a personal loan only when absolutely necessary. If you can postpone the requirement, do it. It will give you time to accumulate money and use it rather than relying on a personal loan.

A personal loan can be a saviour: Use it with responsibility

During times of emergency, a personal loan, with its quick availability, can be a saviour. Personal loans can also help celebrate happy moments like family functions, festivals, vacations, etc. However, you should follow the dos and don’ts of personal loans. You should go for personal loans only when needed, use the money judiciously, and repay on time. When you do that, you will be able to enjoy their benefits. Else, they can land you in a debt trap. So, beware and stay clear of what you should not do with a personal loan.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.