- Committing mistakes like taking loans at a higher rate of interest can raise your cost immensely
- Read here the mistakes you should avoid when taking personal loans, home loans, etc.
A loan helps meet your various needs such as getting you a car and home, funding your trip overseas, and giving you instant funds for medical emergencies. The utility of a loan can be best felt when you have zero to inadequate savings to meet your instant needs. Since you may like to grab the loan quickly, you could end up committing some mistakes which might work against you in times to come. These mistakes can be choosing the wrong lender, picking a higher rate of interest, and much more. Mistakes may not be common among all the loans. So, it’s important to know the mistakes people generally commit when taking different loans in India. Knowing the same will help you avoid such mistakes and enjoy a peaceful loan journey. Let’s begin!
Table of Contents
- 1 Let’s Talk About the Possible Mistakes on a Personal Loan
- 2 Let’s Talk About Home Loan Mistakes Now
- 3 Mistakes to Avoid When Taking a Car Loan
Let’s Talk About the Possible Mistakes on a Personal Loan
A personal loan is taken to get funds for marriage, education, travel, medical emergencies, etc. It’s a short term loan that can be taken for a maximum of 5 years. Here are some mistakes that you should avoid committing when taking a personal loan in India.
Failing to Compare Personal Loan Interest Rate
Personal loan interest rates are usually on the higher side because the loan can be given without submitting any collateral to the lender. But still, you need to compare the rates of different banks and non-banking finance companies (NBFCs). Else you might end up paying much more to the lender. Personal loan rates range from 10-25% per annum on average. As the cost of funds for banks has reduced substantially of late, they have reduced interest rates of personal loans just like they have done in the case of home loans. Choosing the best out of the lot will mean comparing them. We have put the rates of different lenders in the table below so that you can compare and choose the best one for you.
|Lenders||Interest Rates (In Per Annum)|
|HDFC Bank||10.40% - 17.00%|
|ICICI Bank||10.75% - 17.50%|
|State Bank of India (SBI)||9.60% - 13.60%|
|Bajaj Finserv||14.00% - 16.00%|
|Kotak Mahindra Bank||10.75% Onwards|
|Fullerton India||12.00% - 25.00%|
|YES BANK||10.70% Onwards|
|IDFC First Bank||10.49% - 31.00%|
|Bank of Baroda||10.00% - 15.60%|
Not Focusing on the Type of Interest Rate
Many Borrowers don’t pay much attention to the type of interest rate they are offered on a personal loan. There are mainly two types of personal loan interest rates – Flat Rate and Reducing Balance. With a flat rate of interest, the interest is charged on the principal loan amount every month. Whereas, in a reducing balance method, the interest will be charged on the reducing balance every month.
If you have taken a personal loan of 5 lakh for 5 years at 12% on a reducing balance basis, the EMI for the first month will be INR 11,122, of which the principal component will be INR 6,122. The interest for the next month will be charged on INR 4,93,878 (5,00,000-6,122) and so on. This way, the interest liability reduces significantly compared to when you take a flat rate loan where the interest will be charged on INR 5 lakh all the time irrespective of the EMI payment you make to the lender.
Not Checking the Credit Score Before Applying for a Personal Loan
As a personal loan is an unsecured loan, the importance of credit score is massive here. A good score of 750 and above can make personal loan approval more of a formality. Whereas scores below 700 can make the lender reconsider its decision of providing a personal loan to borrowers. It may either approve or reject the loan application. So, if your credit score is bad and you apply for a personal loan, chances are high that the lender will reject the loan application. If the rejection happens, your credit score will dip further. Also, when you know that your credit score is not up to the mark, you can avoid applying at that point. Instead, you can take a loan against fixed deposits, gold, mutual funds, shares, etc, where there is no requirement of credit score. But if your credit score is good, you can use it to negotiate for a better interest rate deal. So, it’s advisable to check your credit score before applying for a personal loan. You can check the credit score at CIBIL or any other credit bureau online. You can even check it at Wishfin, the official partner of India’s top credit bureau CIBIL.
Don’t Consider Savings While Taking a Personal Loan
Often people don’t care to use savings when we get the approval for the loan amount they wish to have. The result is the increasing interest burden for them over time. Checking carefully the savings you have can help you apply for an optimized personal loan amount and reduce the payment obligations that follow.
Let’s Talk About Home Loan Mistakes Now
Banks and housing finance companies (HFCs) offer home loans for buying, constructing, renovating and extending the housing units. Opposed to a personal loan, a home loan is a long term loan that can run for a maximum of 30 years. So, if you commit mistakes taking this loan, you might rue later on! Below are the mistakes that some commit on a home loan, but you should fall prey to the same.
Not Comparing the Home Loan Interest Rates
Even as home loan interest rates are quite low now at 7-8.50% on average, you are not relieved from your usual duty to compare rates. On a long-term loan like a home loan, even a difference of 0.50-1% can bring a huge difference to your payment in the end. Let’s compare by checking the interest rates of top lenders in India.
|Lenders||Interest Rates (In Per Annum)|
|State Bank of India (SBI)||6.70%-7.30%|
|HDFC Limited||6.75% - 8.00%|
|ICICI Bank||6.75% - 7.55%|
|LIC Housing Finance (LIC HFL)||6.66% - 7.90%|
|Bank of Baroda||6.75% - 8.25%|
|PNB Housing Finance (PNBHFL)||7.35% - 9.05%|
Choosing the Fixed Interest Rate Method
Home loans are offered predominantly on a floating interest rate basis. With that, the home loan interest rate will keep changing throughout the tenure with the change in market rates. This could make some nervous and opt for a fixed rate of interest on their home loan. The fixed interest rate ensures the same loan pricing throughout the tenure. But if you choose a home loan on a fixed rate basis, you will rue to see massive interest payments to the lender. Yes, a fixed rate home loan comes at an interest rate of 3-4% more than a floating rate loan. Even as the floating rate will keep changing, the repayment will most likely be lesser than a fixed rate loan. So, keep the repayment fluctuation out of your mind and don’t commit the mistake of choosing a fixed rate loan. Also, whether you choose a fixed rate or floating rate home loan, the monthly installment i.e. EMI will remain the same. What will change is the portion of interest and principal with the change in the interest rate in a floating rate loan.
A teaser home loan is a unique offering where there will be a fixed rate of interest for 2-5 years and then it will convert into a full-fledged floating rate. In an increasing interest rate scenario, it might seem attractive but will most likely be counterproductive. As the fixed rate will remain high, even if it is for a short period of 2-5 years, your obligation will most likely outnumber the one with a floating rate loan. If you consider the last 3-4 years, the floating home loan interest rate has been below 10%. And in the present scenario where the COVID-19 pandemic has taken a toll on businesses across the country, any upward movement in the interest rate is not likely in the near term.
Choosing a Very Long Tenure
As the home loan quantum remains quite high because of the increasing property prices, many borrowers choose a long tenure so that the Equated Monthly Installments (EMIs) remain lower. You can thus do some homework and see whether you can manage a slightly higher EMI by choosing a shorter tenure. Now, you could ask, why should I do this? Well, you can save massive interest payments by choosing a shorter tenure. A home loan EMI calculator is there to show you the difference in repayment. Choose a suitable repayment estimate by entering the loan amount, interest rate and tenure in the calculator.
Example – You and your friend apply for a home loan of INR 50 lakh each at an interest rate of 7.80% per annum. Both of you earn INR 1 lakh a month. If you choose a 20-year tenure and your friend chooses 25 years, how will the repayment pan out for both of you? You will need to pay an EMI of INR 41,202, while your interest obligations will be INR 48,88,432 over 20 years. While your friend will pay an EMI of INR 37,931 and interest of around INR 63,79,216. See the difference. You may be paying a slightly higher EMI of INR 3,271, but see the savings of INR 14,90,784 (63,79,216-48,88,432) you are likely to have over your friend in terms of interest payments.
Mistakes to Avoid When Taking a Car Loan
You can apply for a car loan to buy a brand new or a second-hand four-wheeler. The loan can be given for a maximum of 7 years for new cars and 5 years for second-hand vehicles. So, what are the mistakes you should avoid committing when taking a car loan? Let’s find out!
Buying a Car on Loan That Has a Very Less Resale Value
Firstly, buy a car on a loan when you need it and not otherwise. If you just want to flaunt with a car even if your overall financials are not great, avoid taking a loan for the same. Now come to the point of resale value. You will do well to know that a car is a depreciating asset and its value comes down sharply over time. But there are some cars which will have good resale value after a few years of use. If you decide to buy such a car on a loan, you will feel good by the time you look to sell the 4-wheeler. You can get a good realization from the sale. Whereas, if you buy a car that has a very less resale value, you might not get the amount you want at the time of sale. So, the loan payments over the chosen tenure will exceed the money you could get on selling such a vehicle.
Not Checking the Credit Score Before Applying
As the car is a depreciating asset, the loan does pose a credit risk for lenders in case borrowers default on loan payments. Keeping this in mind, lenders would want you to have a credit score of at least 700. You will only increase the scope for loan rejection in case the score is bad and you are not aware of it before applying.
Applying for a Car Loan without Knowing the Down Payment Sum
If you believe a car is financed fully by the lender, you are wrong! The finance is limited to 80-90% of the on-road price of new cars and 70-80% of the value of second-hand cars. So, don’t commit the mistake of carrying this impression. Create the savings bucket for you and apply when you can pay the down payment sum.
Not Paying Attention to Car Loan Interest Rates
When you go to the showroom dealer, the officials there might tell you to deal with their lending partners. Now the interest rate of such lenders can be at par with the market rate or more than that. In case you agree to deal with a lender that offers a greater rate of interest than the prevailing market rate, you won’t enjoy driving. The massive interest rate and sharply losing car value would make you financially concerned. To ease such concerns, we have put out the interest rate of top banks. Choose from it carefully.
|Lenders||Interest Rates (In Per Annum)|
|SBI||7.75% - 8.45%|
|HDFC Bank||7.70% - 13.55%|
|ICICI Bank||9.30% - 12.85%|
|Axis Bank||9.05% - 11.30%|
|Bank of Baroda||7.50% - 10.30%|
|Canara Bank||7.50% Onwards|