5 Dos and Don’ts for an Instant Personal Loan

August 25, 2022

Hear 5 do’s and don’ts for an instant personal loan

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The holiday season is just around the corner and you might already be planning some expensive items to buy during the auspicious festivals. Although we like to believe that the products on our shopping list are absolutely necessary, we may not have enough savings to buy them in one payment. Apart from this, you might need urgent funds to pay for your medical bills, children’s school fees, household repairs and for a number of other reasons. During these times, if you are short on cash, liquidating your investments may not be the right solution. But with the help of an instant personal loan, you can deal with financial crises smartly.

Instant personal loans are offered by most banks, non-bank financial institutions (NBFCs), and fintech companies. They are very similar to regular personal loans with a few added benefits. These loans have a hassle-free loan application process. You can avail an instant personal loan without any collateral in minutes. However, as an applicant and potential borrower, you must follow certain guidelines to avoid future disappointment. This article lists a set of instant personal loan do’s and don’ts to help ease your borrowing and repayment journey.

Back for an instant personal loan:

1. Compare interest rates from different lenders:

Since personal loans have the highest interest rate, they should be the main deciding factor when choosing an instant personal loan. The interest rate generally ranges from 11% to 28% per year and can even go higher depending on the lender. Although the equivalent monthly payment (EMI) seems affordable, you end up paying much more than the principal amount when the loan term is 4-5 years longer. Many banks attract customers with different offers by slightly reducing the annual interest rate by 20 basis points to 50 basis points (i.e. from 0.20% to 0.50% per annum) . Preferably, if your credit history is strong and your credit score is high, you can use this as leverage to negotiate a better interest rate with your bank.

2. Check the eligibility criteria:

Personal loans are offered based on your age, employment, annual income, repayment history, current financial obligations, etc. The eligibility criteria are generally very clear and easy to understand. Apart from this, you should also check the list of required documents. Before applying for an instant personal loan, you should check if you meet the lender’s eligibility criteria and have all the required documents at hand, as failure to meet the criteria and/or missing documents will result in the rejection of the loan and could impact your credit score.

5 Dos and Don'ts for an Instant Personal Loan

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3. Plan a repayment strategy:

When applying for an instant personal loan, you must have a workable repayment strategy. With an online application process, taking out a personal loan has become a breeze, but impulsive borrowing can lead to unmanageable debt or over-indebtedness. Having a repayment strategy will ensure that you pay off your debt without any financial burden. You can calculate your EMI and plan accordingly using personal loan calculators available on many financial websites. Remember to consider your fixed and variable expenses, including existing EMIs, when planning the repayment strategy.

4. Choose the term of the loan according to your needs:

Personal loans and instant personal loans usually come with a loan term of 1 to 5 years. In order to make EMI affordable, lenders show you the EMI calculator with the longest loan term, without even disclosing the interest rate. However, keep in mind that the longer the loan term, the more expensive the loan. Therefore, instead of opting for the longest loan term, you should check the interest rate and calculate the loan cost for your preferred loan term. This will help you choose the right loan term based on your needs.

5. Carefully read the terms and conditions of the loan:

A personal loan is an urgent requirement, but it is advisable not to apply for an instant personal loan in a hurry. Instead, do your research and apply to the lender with which your eligibility and requirements best match. Most importantly, read all the terms and conditions and fees such as processing fees, prepayment fees and foreclosure fees in advance, so that you don’t get any unpleasant surprises later.

Don’ts for an instant personal loan:

1. Don’t apply to too many lenders:

When you apply for a new loan or credit card, the lender inquires about your credit score with the credit bureaus. Multiple credit score inquiries over a short period of time can affect your credit score. Moreover, when lenders reject your applications due to bad credit ratings, it can also hurt your credit rating. Therefore, check and compare all loan details, check if you match their eligibility criteria, and choose one or two lenders that meet your needs. Besides improving your credit score, it will also create less confusion.

2. Don’t go for more than you can afford:

Applying for a credit limit higher than you can repay results in a loan application being rejected. Since you don’t have to provide collateral in an instant personal loan, you should only consider your sources of income and only ask for an easily manageable amount that you will be able to repay. When assessing your credit repayment capacity, you should consider all fixed and variable expenses, the possibility of increased expenses, and your current contributions.

Also consider your debt ratio when applying for a personal loan. A debt to income ratio is a ratio of your monthly EMIs and your monthly income. Having EMIs below 30% of your monthly income is considered a good debt to income ratio. The higher the ratio, the higher the chances of the loan application being rejected. A higher ratio indicates that your liabilities are greater than your income. For example, if your monthly salary is Rs 50,000 and your existing EMIs cost Rs 30,000, your debt to income ratio is 60%. Lenders generally consider it risky if the ratio is above 45%.

3. Do not apply to an unrecognized lender:

Nowadays, you come across several instant personal loan advertisements on social media. If you are considering opting for a personal loan, you might be tempted by such advertisements offering a very low interest rate, quick availability of funds and/or flexible eligibility criteria. However, such offers could be spam which will steal your personal information or the lender may have other hidden charges. Opting for an instant personal loan from an unrecognized lender can lead to future disappointments. Therefore, it is advisable to apply for an instant personal loan only from a reputable bank or NBFC with good customer reviews.

4. Do not ask for short-term loans:

Several fintech players in India have started offering short-term loans, such as payday loans, advance salary, one-month credit, etc. These loans can be useful when you are short on cash and need cash instantly. However, the interest rate of these loans could be higher than that of ordinary personal loans. Moreover, if you miss the due date, you will have to pay high late fees, which can make your loan very expensive. Short-term loans are very expensive and if you are not financially disciplined, they can put you in a debt trap, which can be difficult to get out of.

5. Do not blindly opt for No Cost EMI:

Many banks and NBFCs offer no-fee EMIs or zero-interest EMIs on many online and offline purchases, especially consumer durables. However, lenders often recoup the interest amount on the processing fee or don’t give the discounts you would otherwise get. Therefore, you must check and compare your total expenses and make an informed decision when opting for an instant personal loan.

To conclude…

Before applying for an instant personal loan, it is crucial to analyze your needs and desires in order to resist the temptation to splurge if it is not an absolute necessity. An instant personal loan is the best choice in an emergency, especially when you have no other financial support and are in dire need of funds. Unfortunately, most of the time people apply for these loans for instant gratification and pressure themselves into paying heavy EMIs. So, if you want to buy that gadget, jewelry, or luxury item that can easily be carried over, think again and don’t take out a personal loan.

Best wishes,
Ketki Jadhav

Content Writer

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