5 things you should not do with your Personal Loan

The personal loans industry in India saw a remarkable 25.73% surge in search volume, jumping from 51.64 lakh searches in FY'22 to 64.92 lakh in FY'23. The growing demand for personal loans as a convenient way to manage expenses is clear.

While personal loans can be a valuable financial tool, it’s crucial to handle them wisely to avoid undue financial stress. In this article, we’ll discuss 5 personal loan mistakes and how to avoid them.

Be Mindful of What You Apply For

Before you apply for a personal loan, make sure that you have thoroughly assessed your financial needs. Borrowing more than what you need or taking out a loan for non-essential expenses can lead to long-term financial strain. Understand your repayment capacity and ask yourself whether the loan is genuinely necessary.

The section below discusses common loan mistakes to watch out for to ensure you make smarter financial decisions.

Things You Should Not Do With Your Personal Loan

While a personal loan can serve multiple purposes, there’s a fine line between smart borrowing and financial mishaps. Avoiding the following personal loan pitfalls can save you from unnecessary debt in the future.

1. Do Not Use Your Personal Loan for Unnecessary or Discretionary Spending

A personal loan should be used wisely and not for impulsive expenses, such as luxury shopping or expensive dining. Every penny borrowed accrues interest, and using it for discretionary spending can escalate your debt unnecessarily. Avoid this loan mistake by always evaluating whether the expense is truly necessary before borrowing. Always prioritise essential expenses such as medical emergencies, home renovations or repairs, or higher education over casual indulgences.

2. Do Not Borrow More Than What You Actually Need

One of the most common personal loan mistakes is borrowing more than required. When approved for a higher amount, borrowers might be tempted to take it, assuming they can handle the extra cost. However, this results in higher interest payments on funds that weren’t even needed in the first place. Use tools like an EMI calculator to determine exactly how much you should borrow based on your needs and existing obligations. If you're managing multiple loans, consider some personal loan strategies like consolidating your debt or pre-closing high-interest loans.

A simple but important personal loan tip is to borrow with purpose. Only take what you need, not just what’s available.

3. Do Not Miss Payments or Risk Defaulting on Your Loan

Missing loan payments can result in hefty penalties, damage your credit score, and even lead to legal action if the default persists. One of the best loan repayment tips is to stay on top of your due dates. Set up automatic payments or reminders to avoid late payments. If you foresee difficulty in making repayments, reach out to your lender and discuss alternative arrangements to avoid default. Make sure that you can manage your monthly EMIs before taking a personal loan.

4. Do Not Consolidate High-Interest Debt Without a Clear Repayment Plan

Consolidating high-interest debt with a personal loan can be a smart move, provided there is a clear repayment strategy. While it simplifies payments and reduces overall interest, without a solid repayment plan, the risk of prolonged debt increases. Always ensure you have a well-thought-out repayment plan before consolidating debt to prevent increasing your financial burden.

5. Do Not Choose the Lowest Interest Rate Without Considering Other Key Factors

While it may be tempting to go for the lowest interest rate, remember that low rates don’t always mean the best deal. Such loans might come with higher processing fees or shorter repayment periods that could strain your finances. Consider all the associated loan costs, such as processing fees, before selecting a loan.

Note: Seeking personal loan advice from professional financial experts can help you better understand the terms, interest rates, and repayment strategies that align with your financial situation.

Why Choosing the Lowest Interest Rate Isn’t Always the Best Idea for Personal Loans

Opting for a personal loan with the lowest interest rate may seem appealing, but it’s not always the wisest choice. Very low interest rates can sometimes come with hidden costs, such as higher processing fees or shorter loan tenures, which could strain your finances over time.

Along with interest rates, factors such as flexibility in repayment, total loan cost, and additional fees and charges are equally important. A slightly higher rate with more flexible loan terms and nominal additional charges could help manage your finances more effectively in the long run. Therefore, always review the full details of a loan offer and avoid focusing solely on the interest rate to ensure a smarter financial decision.

Conclusion

By carefully assessing your financial needs, prioritising essential expenses, and understanding the loan terms, you can avoid common mistakes and maintain financial health.

Looking for a personal loan with competitive interest rates and flexible repayment tenures? Check out SMFG India Credit’s personal loans of up to INR 30 lakhs*. We prioritise transparency and clearly mention all fees and charges so that you can make informed decisions. Apply online today or contact us for more information.