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5 Personal loan mistakes to be avoided-CASE STUDY

  Wed, Nov 09, 2016     written by : CSF-Team
Personal Loan

Rajiv Arora, like any other middle class Indian parent wanted to fulfil his child's career ambitions. Though he had saved enough in his 25 years of service in a private sector company it was not sufficient to fund a specialized course abroad. His child was looking for a global exposure and aspired to pursue his higher studies in the US.

Rajiv decided to take a personal loan to take care of the tuition fees and accommodation fees. He took an HDFC personal loan since he already had a saving account in that bank. It was the most convenient and less time consuming option. But soon the loan burden landed him in a financial difficulty. The EMI was beyond his capacity and the personal loan interest rate was way too high.

There were many mistakes that he did before taking the loan that led him into a huge loan liability.

Ignoring Credit Score

Rajiv was clueless about what a credit score is and what role it plays in loan approvals. He never bothered to ensure that he had a healthy credit profile. Late payments on credit card bills and a high credit utilization ratio had resulted in a low CIBIL rating. Hence the bank charged him 22% rate of interest. If Rajiv knew the importance of a good CIBIL score, he could have planned well in advance. He could have taken measures to improve CIBIL score. By maintaining financial discipline and compiling a good record of on-time payments he could have qualified for a low interest personal loan and saved thousands of rupees. But now he was looking for personal loan for low CIBIL score.

Not Shopping Around

The most expensive mistake that Rajiv did was taking the first loan that was approved. He did not do an extensive research and comparison of various options to ensure that he gets a deal that is most viable. The interest rates on personal loans, terms, pre closure charges and fees varies greatly among different lenders. It always pays to look around at various alternatives and do an online comparison before rushing into signing the documents. Had Rajiv discussed with the financial experts and approached different sources of financing he could have landed a better deal.

Borrowing More Than The Repaying Capacity

Rajiv was happy that the personal loan eligibility criteria of the bank permitted him to borrow a sum of Rs 30 lakh that was needed to fund the education. But such a huge sum was beyond his affordability. Soon the EMIs overstretched his finances and led him into a crisis. He started defaulting on payment and his CIBIL score came tumbling down. Rajiv should have evaluated his financial condition and ensured that he had sufficient money to pay monthly EMIs as well manage his expenses before signing on the dotted line. After all a loan is a liability that has to be repaid along with a high interest amount in a timely fashion. He should not have borrowed the whole amount if he could not easily pay the monthly EMIs without straining his budget.

Not Exploring Alternate Options

Personal Loan interest rates are very high making this type of loan a very costly proposition. Rajiv should have explored for other options like loan against property, loan against securities, education loan or gold loan which have a significantly lower rate of interest. These alternate options would have been easier on his pocket. Personal loan should be opted only as a last resort when there is no other way out to meet emergency requirements.

Missing Payments

As with any other loan, a timely payment of the EMI of personal loan is imperative to maintain financial stability and keep the CIBIL score intact. Rajiv did not follow this ground rule and fell into a debt trap. Though taking a personal loan helped him meet his immediate requirement of funds, failing to service the debt properly caused his CIBIL score to plummet.

Avoiding these pitfalls would have enabled Rajiv to service his debt more easily.

One should look at the budget carefully before taking out a personal loan. Only if one can afford the monthly payments should one go ahead with the decision of taking a personal loan. Planning a little ahead of time and working to improve credit score can help one save thousands of rupees. Shopping around and comparing the deals offered by various lenders helps one to secure the best possible deal.