Whether for a medical emergency, a quick home renovation, or even a luxury vacation, a personal loan has become essential for managing all short-term cash flow needs. In India, where the credit market is expanding exponentially, it is easy for borrowers to be swept up by attractive offers, which can lead to mistakes. Without careful planning and due diligence, personal loans can become a financial burden.

At MyFi, we aim to offer you the easiest ways to get loans and create an environment of education. We believe that being armed with all the information allows you to make better decisions. 

5 Most Common Mistakes to Avoid When Seeking a Personal Loan

A personal loan is generally a loan without any collateral. While there are some minor variations to how you can avail of each loan from a lender, there are common mistakes that borrowers often make. 

Insufficient Research and Comparison

One of the most frequent errors borrowers make is not taking the time to compare loan offers. The Indian market is highly competitive, with banks and non-banking financial companies (NBFCs) offering personal loans that vary significantly in terms of interest rates, processing fees, and repayment terms. According to industry estimates, nearly 60% of borrowers do not shop around thoroughly, which often results in paying more than necessary. Spending a little time researching multiple lenders, comparing their offerings side by side, and reading reviews from other customers could save you money in the long run. 

Ignoring Hidden Charges and Fees

Personal loans often come with a range of additional costs beyond the headline interest rate. Hidden charges such as processing fees, administrative costs, prepayment penalties, and late payment fees can add up quickly and lead to a significant amount. Unfortunately, many borrowers sign on the dotted line without a clear understanding of these extra costs. Always read the fine print and ask for a detailed breakdown of all charges associated with the loan.

Borrowing More Than You Need

In the era of easy credit, it’s tempting to borrow more than necessary. However, taking out a loan that exceeds your actual financial requirements can lead to unnecessarily high monthly installments and prolonged repayment periods. Over-borrowing could potentially increase your debt burden and make it harder to manage your finances, especially if unexpected expenses arise. Assess your needs realistically and borrow only what you truly require. 

Not Considering Your Credit Score and History 

In India, lenders typically look for a credit score of 750 or above to qualify for the best interest rates. Yet, many borrowers fail to check their credit history before applying. A low or inaccurate credit score not only diminishes your chances of getting approved but can also result in higher interest rates and less favorable terms if you do qualify. Obtain a free credit report from reputable agencies, check for errors, and take corrective steps if needed.

Underestimating the Impact on Future Creditworthiness

Your current loan repayment behavior plays a significant role in shaping your credit future. Late or missed payments can hurt your credit score, making it harder to obtain loans later or forcing you into higher interest rates. Always ensure that your monthly installments fit comfortably within your budget. Consider setting up automatic payments or reminders so that you never miss a due date. 

Neglecting Loan Against Mutual Funds in India

While personal loans are a popular choice, many borrowers overlook an alternative that could be more cost-effective—loans against mutual funds. These loans allow you to secure funds by pledging your mutual fund holdings as collateral. Because the loan is secured, interest rates tend to be lower than those for unsecured personal loans. According to the Economic Times, personal loan interest rates range from 14% to 24%, while loans against mutual funds can be as low as 8% to 10%. 

Benefits of Loans Against Mutual Funds:

• Lower interest rates: Since your mutual fund investments serve as collateral, lenders consider this option less risky, resulting in reduced interest rates.

• Quick approval process: With collateral in place, loan approvals are typically faster and involve less documentation.

• Retention of investment benefits: Unlike selling your funds to raise cash, when you take a loan against mutual funds in India, you are only pledging them, which lets you continue benefiting from potential market gains.

• Flexible repayment options: Many lenders offer more lenient repayment terms, which can be a relief if your financial situation changes.

Use the MyFi Loan Against Mutual Funds Eligibility Calculator to check your eligibility instantly! 

Personal loans can be a powerful financial tool, and with information on the common mistakes to avoid while taking out a loan, you can make truly informed choices. And if you need any financial assistance or information, MyFi is always at your fingertips! 

Find us at: Twitter | Linkedin | Instagram
Download MyFi: Android | iOS

FAQ

• What is the difference between a personal loan and a loan against mutual funds?

A personal loan is unsecured, while a loan against mutual funds requires pledging your investments as collateral, usually at lower interest rates.

• How do I choose between a personal loan and a loan against mutual funds?

Choose a personal loan for quick access without collateral. Opt for a loan against mutual funds for lower interest rates while retaining investment benefits.

• What should I consider when comparing personal loan offers?

Look at interest rates, fees, repayment terms, hidden charges, and lender reputation before choosing.

• How can I get better loan terms?

Maintain a good credit score (750+), provide accurate documents, and compare multiple lenders.

• What if I can’t repay my personal loan on time?

Contact your lender for options like restructuring. Avoid missing payments, as this can negatively impact your credit score.