It’s nearly impossible to spot the sharks until it’s too late to turn back, they say. The same goes for certain types of loans. It’s no secret that debt is an evil necessity in today’s world. People are warming up to the idea of “borrowing” from traditional banks and alternative lenders. New era fintech companies are time and time again offering faster and more lucrative personal loan products.
“Instant loans are a huge draw for people because customers can save the hassle of saving for various purposes. It is more convenient to take out a loan and pay in several easy installments over a long period of time. People are so enamored with the treatment and the quick and simple payout that they often overlook these pitfalls until it’s too late,” says Aditya Kumar, Founder and CEO of Qbera.com.
Below is the list of the 5 most dangerous personal loan pitfalls and how to avoid them:
Prepayment charges: You have obtained the loan and opted for a term of 24 months. Six months later, you’ve received an unexpected windfall in the form of a pay rise, and you’re able to close the loan once and for all (and save on interest). To your surprise, you find that the rules and the prepayment fees are too high. You feel compelled to drag out loan repayment. Therefore, opt for a lender that offers a free pre-closing facility.
Origin/Processing Fee: Almost all unsecured loans come with processing fees and there is no escaping them. But you can still get a better deal if you remember to compare the APR (annual percentage rate) of a personal loan rather than the interest rate alone. Some lenders simply deduct these fees from the approved loan amount, which many customers do not anticipate. It’s a way lenders make sure you don’t close the loan early and it’s actually a prepayment penalty in disguise.
Read the fine print and don’t make hasty decisions: Customers groan when they hear the age-old advice to “read the fine print.” It’s tedious, long and boring full of heavy financial jargon. But this is where they “hide” dangerous terms and conditions, which are exposed and therefore easy to miss. “Don’t get carried away with enticing slogans like ‘lowest rate ever’ and the like. Agents and sellers can pressure you into making a quick decision by saying things like ‘offer expires today. ‘today’. But we urge you not to be impulsive; assess your needs and consider the features of the loan before making a decision,” says Kumar.
Do not rely solely on your bank: You have been a bank customer for ten years and when you need an emergency loan your first choice is naturally your own bank. You think you might be able to land a better deal because of your association with them. But that’s not always true. “They’ll never even give you the cheap options they offer non-customers because it’s relatively easy for them to persuade you to take anything they offer. Do your research. There are a number of reliable third-party financial product comparison websites that provide accurate and up-to-date information on personal loans. Shortlist at least 5 and contact them. You might get a pleasant surprise,” suggests Kumar.
Do you need your personal loan to be insured? : When you are offered an insured personal loan, beware. Some personal loans offer insurance (the most common being life insurance and job loss coverage) “at a disposable price” attached to it and this is often futile because the costs associated with it often turn out to be a shock. Unemployment protection might be a bit more compelling as it can take care of your worst-case IMEs. It’s best not to go (and save some money) if you’re not at a huge risk of being laid off in the next six months.