Personal loans are loans taken from a financial institution, usually a bank, for any miscellaneous purpose not specified by the debtor. In essence, personal loans fall under the category of unsecured debt. This means that in the event of bankruptcy on the part of the debtor, the creditor can’t lay claim to any asset in the debtor’s estate since no asset had been mortgaged or had been held in guarantee against the money lent to the debtor. Therefore, this entails a lot of responsibility on the part of the person applying for the loan, as a successful return of the loaned amount would inevitably raise their credit score and would open up more opportunities for them to obtain personal loans in the future.
Therefore, when taking up a personal loan, one needs to be aware of what one must not do that would endanger their credit score and prevent one from getting personal loans again. Here are 10 things one shouldn’t do with a personal loan:
- Less the Tenure, Less the Number of Issues:
Although one need not specify the use for which one is taking a personal loan, or even one need not mortgage their assets as collateral for the loan amount. Yet, fundamentally, a personal loan is like a debt, since you have borrowed money from the bank to tackle unexpected contingencies. Often, many people commit the mistake of prolonging the period of repayment when in fact it could become a burden thanks to the accrual of interest. By keeping the tenure shorter and striving to repay the loan amount sooner, you are able to dodge a very common problem faced by many.
- Cut Your Coat According to Your Cloth:
This wise idiom is applicable in all the arenas of life, and this couldn’t be better suited to describe this next advice. The features of a personal loan might tempt any good soul to loan an amount that is more than what is necessary for them. Remember that at the end of the day, you need to repay the entire amount you had taken a loan, plus the extra charges accrued as interest. Taking a large loan amount would only invite your entrapment into debt, which can involve (rather literally) a high price.
- Don’t Spoil the Broth, Keep it Simple:
You must have heard how the multiples of the same thing can lead to potential harm, and trust us when we say that too many cooks do end up spoiling the broth: the broth here would be your credit score whilst the cooks would be a plethora of personal loans you might consider taking. Keep it simple and be content with what you get, and try to solve your financial commitments with this amount; you can always borrow from friends and family – and that’s better than getting buried under a heap of debt.
- Multiple Banks Doesn’t Translate Benefit:
It may happen that you are in urgent need of money and you need a personal loan badly, but there is always the chance of having your application rejected by the bank of your choice. So perhaps, the obvious thing to do would be to apply with multiple banks, right? No. It is the worst thing one could ever do since each bank’s evaluation of your credit score makes it drop a little. Now imagine that situation if you have applied for a personal loan from a dozen banks! That’s a nightmare one would certainly want to avoid! Perhaps, checking out personal loan schemes of various banks would be the best thing to do!
- Be Punctual with Your EMIs:
Remember that personal loans are always a two-way street. When a bank sanctions your loan, it would expect in good faith for you to return the loan amount in a timely manner, and such payments are called EMIs. Skipping your EMI payment at the stipulated time would hurt your credit score bad and it would be difficult to obtain personal loans in the future. Punctuality always helps, especially when it comes to financial discipline.
- Compare and Commit:
One of the blessings of the Internet is our current ability to assess and compare almost everything under the sun. As far as personal loans are concerned, many websites are available which allow you to compare various aspects of two or more personal loan plans. Now, you have the power to choose instead of relying on gossip and hearsay. You can prioritize the object of comparison as well as dig up extra benefits or utilities available with a personal loan plan.
- Look Before You Leap:
Often, banks make it easier for us when it comes to paperwork regarding application for a personal loan. We are told to only sign at the places specified by the bank, whilst other details are usually filled in by bank employees. This makes us sigh at the dotted line because we trust reputed banks knowing that they would never play tricks on us. However, it is always better to be safe than sorry, and therefore one should read the fine print carefully before committing their signatures to the form.
- Use the Loan to Iron Out Problems:
The fact that there is no condition upon which a personal loan could be issued might tempt you to use the amount you have received as your personal loan for recreational purposes like shopping, going on a holiday, etc. Even though it wouldn’t be wrong to do so, this is something that is strongly advised against if a good credit score is to be maintained.
- Keep a Track on Your Loans:
Keeping a track on your loan and its related aspects is a very good practice, one that should be cultivated in managing financial affairs. Once your loan is sanctioned, you’d receive a number of documents. These documents should be kept safely so that in the event of a dispute these documents can help you to make your case stronger. Also, it is advisable for you to check these documents carefully for typos or errors of commission and omission; it wouldn’t be a nice feeling if the loaned amount is more than what you sought or if the interest rate is incorrect.
- Don’t Play with Your Personal Loan:
It might seem like a great idea at first, to use the amount of your personal loan for investing into the stock market or other such speculative activities. But stock markets being stock markets, it is not always possible to correctly predict the outcome. You might invest the loaned amount with the intention of getting lucrative returns on your investment, but the moment things go awry, you’d realize the seriousness of your ill-judged decision. If you really wish to speculate, do so by not endangering your credit score, by using money specifically for this and not your personal loan.