Personal loans are a great way to get out of a financial difficulty or to finance expensive purchases. Although more and more people are looking into building up a savings and investment portfolio, an immediate lump sum is still helpful on the occasion of emergencies or expensive ventures that need supplementary funding. Whether it’s for paying tuition fees, funding a business, or paying for emergency medical crises, personal loans offer an excellent refuge for an almost instant supply of cash. Although applying for a personal loan may seem easy and straightforward, there are certain aspects of it that borrowers tend to forget. These mistakes can be detrimental to your credit history as they can result in a declined application or worse -- a debt trap.
To help you out, GoBear has listed down 5 of the most common personal loan mistakes you should avoid for better financial health.
1. Not knowing your credit status
Your credit status is akin to a VIP ticket to obtaining personal loans. With a good credit score and history, you’re unlikely to struggle with the application process. However, many applicants are not aware of how credit-worthy they genuinely are, and often over or under-value their credit standing. For instance, it’s essential to know whether or not you have unsettled debts or unpaid bills in your account, as they can significantly decrease your chances of approval for a personal loan.
As borrowers, you’re subject to the lender’s evaluation, which they meticulously check to ensure that they’re working with people with the capacity to pay back any loans. As a result, you must take the prerogative to settle anything on your credit account that may trim down your chances of approval. That begins with knowing your credit status, which you can use as a reference to clear out your balances and start a new credit line.
2. Not comparing personal loan offers.
Not comparing personal loan offers can be unfavorable on your end, as you can miss out on great offers by settling on one immediately. Comparison platforms like Gobear let you compare personal loan offers by providing information about lenders’ interest rates, charges, and even maximum loanable amounts. These will help you determine whether the offer you’re leaning toward is genuinely right for your financial capability, or if another would better suit your needs.
Don’t get overwhelmed by offers that seem too good to be true and take the time to compare and think about your decision. A personal loan is essentially a slightly long-term commitment, and you want to be comfortable with the interest rates and terms within your contract. It’ll also save you from debt baits and traps from hidden fees that lenders may not directly inform you about, so it pays to do your research.
3. Borrowing for luxury.
There isn’t a rule that limits the purpose of your loans, so it can be tempting to use the lump sum on luxury goods. A lot of people who don’t have a good relationship with money often succumb to a lifestyle creep once they have easy access to funds. For instance, P100,000 may seem a lot at first, but when you have P1,000,000 in your account, the former will look like a small amount. As a result, money that you borrowed for ideal purposes such as future investments, important home renovations, or starting a business can dwindle through unplanned micro-transactions.
You want to avoid these incidents from happening at all costs, as you might run out of money for your intended purpose. So before you buy the latest smartphone with the loan you took to finance your business, think about the possible consequences of your choice.
There is nothing wrong with buying luxury items as long as you purchase those with your extra cash, not through loaned money padded with interest charges.
4. You don’t know your repayment capacity.
Most borrowers who fall for debt traps are those who didn’t correctly evaluate their ability to pay back loans. When taking out a personal loan, you’ll need to agree on a repayment plan, which you decide based on your monthly salary, and source and stability of income. Before borrowing, create a budget plan that indicates your receivables against all your payables.
Determine how much money you have left after other monthly obligations by creating a realistic breakdown of expenses, and figure out what spending categories you can cut. Only then will you know how much of your loans you’re capable of paying back every month. Don’t pledge for a repayment amount that takes almost half of your monthly salary unless the remaining amount is enough to give you a financial cushion, or if you have other sources of income that can keep you afloat.
5. Applying from multiple lenders.
Oh yes, there are plenty of lenders out there who are ready to lend you money even without collateral. Sometimes, all you have to do is to present two valid government-issued IDs, and you can take home as much as twice your monthly salary’s worth. But here’s the catch -- applying from multiple lenders will hurt your credit score. Lenders view this side of your credit history as a dire need to get cash, which is often indicative of a bad financial situation.
Banks and other lending institutions avoid these types of clients, as it’ll prove your inability to repay the money that you wish to borrow. Applying to too many lending institutions can also lead to a worse financial situation as you may end up grabbing whatever is available, even if you can’t repay your accumulated debt.
Before applying for a personal loan, make sure you have documents to prove that your income is fixed and stable. An updated Income Tax Return should be sufficient, but some lenders even ask for a Certificate of Employment and Business Permits.
It’ll also help if you settle previous debts before attempting to open a lending account. With the availability of a credit bureau, lenders already have an easy way of checking your borrowing profile or credit score. Any unfavorable information they see can lead to rejections. As a result, settling everything in your account before making any inquiries is the safest move to make.
If you think you’re well-prepared, start comparing personal loans with GoBear to see which lender offers the best deal with the lowest interest rates!
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