5 Personal Loan Mistakes You Can't Afford to Make
Don’t allow your personal loan to cost more than it needs to be
In some ways, you can control how much extra your financing needs will cost.
This is especially true when you consider how some people don’t bother to shop around for lower rates or pay closer attention to ALL the fees associated with their loan.
Let’s take a closer look at the potentially costly slip-ups one can make when applying for a personal loan:
1. Applying for the ‘wrong’ type of loan
You might not be aware but there are actually many types of personal loans available and if you get one that is not quite right for you, then you may be missing out.
Different personal loans can cater to many unique circumstances, for instance; there are special loans for those who need quick cash or for applicants earning very low incomes.
There are also certain loan products for specific vocations and employment types. You’ll find that there are personal loans packaged with competitive rates and extra benefits for teachers, government employees, executives, etc.
Also, applying for the right kind of loan for your special circumstance might improve your chances for approval! This is because, if a certain product is tailored for your situation i.e. financing for very low-incomes, you don’t have to worry about scanty earnings costing you your application.
Do note that this does not necessarily mean that other gloomier areas of your application will be overlooked, for example; a very poor credit rating.
2. Not reading the fine print
Loan contracts and even the less-wordy Product Disclosure Sheets can be bo-ring! But they are incredibly important.
These documents help you understand the terms and conditions of your loan, your responsibilities and what can happen if you don’t pay on time.
For instance, if your loan contract contains the ‘right to set off’ and most do; this would mean that the bank may deduct payments due from deposit accounts held with them. This would include a savings or FD account.
Now if a deduction is made from your FD account to pay off loan balance dues, then this could incur penalty payments for early withdrawal.
This is why it is essential that you study the information available about the loan product of which you are interested. These docs also typically include your rates, added fees like taxes and duties, as well as insurance/Takaful requirements, if any.
You should take these into consideration as you tally up the total cost of your loan and compare it against other offers.
By knowing just how much more (or less) you could be paying, you’ll have the necessary information you need to choose the product that saves you the most (when comparing).
On a side note, if there’s anything you find confusing about your loan package, don’t hesitate to seek clarification – until it is completely clear.
3. Ignoring your credit score
Your credit score is the major basis for how interest rates are applied on your loan application.
In general, better credit ratings lead to lower interest rates. This is because those with good credit are expected to be better paymasters, limiting the amount of risk a bank has to take on when making a loan offer.
Conversely, poor credit may indicate greater difficulty to repay the loan and so the bank, taking on more risks, may levy higher interests as a result.
Unsurprisingly, high interest rates mean that you’ll be paying more – particularly if you are considering a longer repayment period. And since nobody wants to pay more, you’ll need your credit score to look its best when you apply for a loan (personal or otherwise).
The thing is many loan applicants seem to forget or are unaware that they should check on their credit scores before applying. This is a must, especially if you have not reviewed your credit report recently.
There may be disputes, late payments, or repayment defaults that you may have forgotten or simply do not know about. If you check your credit report and it is in fact showing arrears or old debt that you dispute, do clear it off before you apply for the loan.
Do also check out our piece on how to read and get your credit reports for more information.
4. Not planning for repayments
Here’s the hard truth: Malaysian youth have A LOT of debt, from personal loans to credit cards, even multiple long-term debt, like car loans and home mortgages.
But the problem isn’t the loans itself; borrowers need to plan out comfortable repayments in order to cope. As a borrower, you may have to look beyond how the bank deems your repayment abilities. This is because a bank may not take into account all your debts and expenses, but you’ll still have to pay for these nevertheless.
For instance, monthly kindergarten payments and education loan instalments may not figure into the bank’s calculation, but it should in yours. This way, you’ll be able to reasonably figure out a realistic amount that you can repay every month, without it being overly burdensome on your finances.
One way to make your repayments smaller and more affordable is by stretching out your repayment period.
Although, do note that in the long run, you will be paying more in interests. Still, this should lead you further away from mounting, unmanageable debt.
Thus, be sure to look for loans with more flexible or longer repayment periods.
5. Not shopping around and negotiating
This is probably two of the biggest mistakes you can make when applying for a personal loan.
Yes, before making a major financial decision like taking out a personal, it’s smart to research your options. This way you’ll catch a glimpse of what’s available to you and open up opportunities for better rates and more flexible terms.
Because often times, loan applicants falsely believe that the lowest advertised rate is the one they’ll get; but that’s not always the case. Your personal interest rate depends on a number of factors like the amount you are borrowing, your credit rating, employment status, etc.
Thus, by shopping around and comparing between products, not only will you be aware of your average rate, but you may also be able to negotiate better ones.
This is especially possible, when you apply to more than one bank, and are successful on more than one application. You can use the good rates you receive from one bank to negotiate better rates or terms with another.
It’s not a sure-fire way of reducing rates, but it has definitely been known to happen and certainly worth a try!
With these beary wise nuggets of information, start comparing today for the personal loan that you need and avoid the common mistakes!