What to avoid when applying for an online personal loan

By admin | Mar 10, 2021

Online personal loans have become a prefered credit option as they provide the ease of hassle-free application process with quick disbursal of funds. Since they don’t ask for collateral, many people choose online personal loans for unexpected financial emergencies.

While the process of availing an instant loan online is simple and convenient, there are some things that you need to be aware of. Let’s take a look at 5 mistakes we must avoid while applying for an instant loan online.

Not reviewing your credit report

When you apply for an instant loan online, the lender will check your creditworthiness by fetching your credit report from CIBIL. Your credit report reflects how responsibly you’ve behaved with credit in the past. Usually, having a credit score of over 750 is considered healthy by banks and lending institutions. But if your score is lower than 750 then your application is likely to get rejected. Some lenders also practice credit risk pricing i.e. they will factor in your credit score to allocate interest rates on your loan. In such cases, a stronger credit score may help you get a loan at lower interest rates.

Given the importance your credit report holds, you must review it before you submit a loan application for an instant loan online. This can help you catch any errors in your credit report before it is pulled up by the lender. If there are any errors with your credit report, you can contact CIBIL directly and get your report rectified at the earliest. Once all the issues are addressed, you can then resume your loan application process.

Sending an application to multiple lenders

As soon as you submit your instant loan online application, the lenders will initiate requests to obtain your credit report from CIBIL to evaluate your creditworthiness. These lender initiated requests are termed hard enquiries and each of them will get listed in the enquiry section of your credit report. Submitting multiple loan applications within a short period of time can reflect poorly on your credit report and can significantly reduce your credit score.

However, what you can do instead of submitting direct personal loan applications, is to visit an online financial marketplace where you can compare and choose the most suitable lender based on your credit score, income, and other eligibility parameters. While these marketplaces also fetch your credit report from CIBIL, such requests are considered soft requests and will not hamper your credit score.

Not comparing interest rates for lenders

If you’ve done your research concerning instant loan online, you will be aware that the interest rates for these can be anywhere between 10%- 35% p.a. you must compare interest rates from various lenders on online financial marketplaces before finalizing a lender to match your requirements. Do not limit your comparison to just interest rates, some online financial marketplaces also give good information about processing fees, prepayment charges, and other applicable terms and conditions before settling on any particular lender.

Not checking the fine print

Despite hours of research you put in for choosing a lender, you may still be caught off guard with unknown charges once your loan is disbursed. You must read the fine print on the loan agreement to get clarity about any hidden charges. Many lenders are not upfront about the processing fees they charge for a personal loan or prepayment charges a borrower will incur when they try to pay off their loan earlier than the tenure.

That’s why it is essential that you take your time and carefully go through all the regulations on your loan. Check for any of the following charges that your lender might charge you besides your EMI:

  • Service tax
  • Processing fees
  • Prepayment charges 
  • Any additional charges

Gaining clarity on this will help you finalize a lender for your instant loan online.

Ignoring your repayment capacity

When you apply for an online personal loan, the lender will assess your repayment capacity based on the Fixed Obligation to Income Ratio (FOIR) parameter. Ideally, your fixed financial obligations should be 50% of your salary, leaving you enough money to manage your other daily expenses. Applicants having FOIR within 50-60% (including EMI of the new loan) are generally considered by lenders and those with higher FOIR are rejected.

Digital lending platforms have made it easy for people to get an instant loan online. While many players in the market offer loans at competitive prices, it’s always a good idea to do your homework when it comes to finalizing a lender.

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