Taking a personal loan can be a convenient way to meet urgent financial needs, from funding big purchases to handling unexpected expenses. But while getting a loan is easy, repaying it smoothly can be a challenge if you’re not careful. Many people make common mistakes that add unnecessary stress to their repayment journey. To help you steer clear of these challenges, here are seven key missteps to avoid in your repayment journey.
1. Misjudging the loan amount that you would need
Many people make the mistake of borrowing either too much or too little. Borrowing more than necessary means you’re paying interest on extra money, while borrowing too little can leave you short. Before applying, carefully estimate how much money you actually need, so you’re not left struggling with unnecessary debt or unexpected expenses.
2. Taking a loan that you can’t afford to pay back
It’s tempting to take a bigger loan, but if you can’t comfortably pay it back, you’ll struggle every month to meet your EMIs. Calculate how much of your income can go towards loan payments without affecting your other needs. Generally, it’s wise to keep your EMIs at 30-40% of your income so that you have enough left for other expenses.
3. Not disclosing your current financial obligations
Some people don’t tell the lender about other loans or credit cards they have, which can lead to trouble. If you don’t disclose everything, the lender might approve a loan amount you can’t really handle. Be open about your existing debts so that the lender can help set a loan amount you can realistically repay.
4. Not choosing the right tenure
The loan tenure you pick affects how much you pay monthly and the total interest you pay over time. A shorter tenure means higher EMIs but less interest, while a longer tenure means smaller EMIs but more interest in the end. Pick a tenure that balances what you can afford monthly with how much total interest you’re willing to pay.
5. Not comparing interest rates
Personal loan interest rates vary from one lender to another. So, if you don’t compare rates, you could end up paying more. Even a small difference in the interest rate can make a big difference over time. Check rates from different banks and financial institutions to find the best deal. Lower rates mean lower total payments.
6. Overlooking the additional fees and charges
Beyond the interest, loans can come with extra fees, like processing charges, prepayment penalties or late payment fees. These can make the loan more expensive. Always ask the lender for a clear breakdown of these fees so you know the total cost upfront. Knowing all the charges helps you avoid surprises later on.
7. Not maintaining adequate bank balance for EMI
If you don’t have enough money in your account on EMI due dates, you’ll get charged penalties. This might negatively impact your credit score, especially if you miss payments repeatedly. To avoid this, set up auto-debit for your EMIs so they’re deducted automatically each month. This way, you won’t accidentally miss a payment.
Endnote
You can avoid these mistakes with a bit of early planning and simple financial habits. Start by making a clear financial plan and setting aside some emergency savings. This way, if unexpected costs pop up, you won’t need to rely on loans as much.
Knowing how much you need and sticking to it can also help you avoid borrowing too much. An emergency fund gives you a cushion for surprises, so you can take a smaller loan or even skip borrowing entirely. With a bit of planning, you can keep your finances stable and make loan repayment a lot easier.