5 Dos and Don'ts for an Instant Personal Loan

Instant personal loans are offered by most banks, Non-Banking Financial Institutions (NBFCs), and fintech companies. They are very similar to regular personal loans with some added benefits. These loans have a hassle-free loan application process. You can avail of an instant personal loan without any collateral within a few minutes. However, as an applicant and potential borrower, you should follow certain guidelines to avoid future disappointments. This article enumerates a set of dos and don'ts for an instant personal loan to help you make your borrowing and repayment journey smoother.

Dos for an Instant Personal Loan:

1. Compare the rates of interest of different lenders:

Since personal loans have the highest rate of interest, they should be the major deciding factor when opting for an instant personal loan. The interest rate generally ranges from 11% to 28% p.a. and can even go higher depending upon the lender. While the Equated Monthly Instalment (EMI) seems affordable, you end up paying a lot more than the principal amount when the loan duration is 4-5 years longer. Many banks lure customers with different offers by marginally reducing the annual interest rate by 20bps to 50bps ( i.e. 0.20% to 0.50% p.a). Advisably, if your credit history is sound and your credit score is high, you can use it as leverage to negotiate a better rate of interest 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 that, you should also check the list of required documents. Before applying for an instant personal loan, you must check whether you meet the lender's eligibility criteria and have all the required documents handy as not meeting the criteria and/or missing any documents will result in loan rejection and may impact your credit score.

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3. Plan a repayment strategy:

While applying for an instant personal loan, you should have a feasible repayment strategy. With an online application process, taking a personal loan has become a child's play but impulsive borrowing can lead to unmanageable debt or debt overhang. Having a repayment strategy will ensure you repay your debt without any financial burden. You can calculate your EMI and plan accordingly with the help of personal loan calculators that are available on many financial websites. Do not forget to consider your fixed and variable expenses, including existing EMIs, while planning the repayment strategy.

4. Choose the loan tenure based on your requirements:

Personal loans and instant personal loans typically come with a loan tenure of 1 to 5 years. In order to make the EMI look affordable, the lenders show you the EMI calculator with the longest loan duration, without even disclosing the rate of interest. However, bear in mind, that the longer the loan tenure, the costlier is the loan. Hence, instead of opting for the longest loan tenure, you must check the rate of interest and calculate the cost of the loan for your preferred loan tenure. This will help you choose the right loan tenure based on your requirements.

5. Carefully read the loan terms and conditions:

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 whom your eligibility and requirements match the best. Most importantly, read all the terms and conditions and charges like processing fees, pre-payment charges, and foreclosure charges in advance, so that you do not get any unpleasant surprises later.

Don'ts for an Instant Personal Loan:

1. Do not apply with too many lenders:

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

2. Do not opt for more than you can afford to repay:

Applying for a higher credit limit than what you can repay leads to a loan application rejection. As you do not have to provide any security in an instant personal loan, you should only consider your income sources and apply only for an easily manageable amount that you will be able to repay. While assessing your credit repayment capacity, you should consider all the fixed and variable expenses, the possibility of any increased expenses, and your current dues.

Also, consider your debt-to-income ratio while applying for a personal loan. A debt-to-income ratio is a ratio of your monthly EMIs and your monthly income. Having EMIs less than 30% of your monthly income is considered a good debt-to-income ratio. Higher the ratio, the higher the chances of loan application rejection. A higher ratio depicts your liabilities are more than your earnings. 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 usually consider it risky if the ratio is more than 45%.

3. Do not apply to an unrecognised lender:

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

4. Do not apply for short-term credits:

Several fintech players in India have started offering short-term loans, such as PayDay loans, early salary, one-month credit, etc. These loans can be helpful when you are in a cash crunch and need money instantly. However, the rate of interest for such loans could be higher than regular personal loans. Furthermore, if you miss out on the due date, you will have to pay a high late payment fee, which can make your loan very costly. Short-term loans are very expensive and if you are not financially disciplined, they can put you in a debt trap, which can be challenging to come out of.

5. Do not blindly opt for No Cost EMI:

Many banks and NBFCs offer No Cost EMIs or Zero Interest EMIs on several online and offline purchases, especially consumer durables. However, the lenders often recover the interest amount from the processing fee or do not give cash discounts that you would otherwise get. Hence, you should check and compare your total outgo 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 analyse your needs and wants so you can resist the temptation to splurge if it is not an absolute necessity. An instant personal loan is the best choice in case of an emergency, particularly when you do not have any other financial support and need funds urgently. Sadly, most times, people apply for these loans for instant gratification and put themselves under stress, paying hefty EMIs. So, if you want to buy that gadget, jewellery, or luxury item that can easily be postponed, think again and do not take a personal loan.

Warm Regards,
Ketki Jadhav
Content Writer