Financial experts warn borrowers to avoid common errors like ignoring hidden fees, damaging their credit score, and overborrowing to prevent falling into a long-term debt trap.
Instant personal loans offer fast, unsecured credit, but they come with risks. Financial experts are cautioning Indian borrowers against five common but costly mistakes that can lead to severe financial strain. With banks and NBFCs approving these loans in under 48 hours, it's crucial for consumers to understand the pitfalls of unplanned borrowing to effectively manage their debt obligations.
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One of the most significant errors is ignoring the total cost of the loan. While advertised interest rates typically range from 10% to 18%, many borrowers overlook hidden charges. Processing fees, pre-payment penalties, and late payment fees can substantially increase the overall cost. "It is crucial to keep in mind that these loans are credit products that are provided by lending institutions to earn interest on," the advisory notes, urging consumers to compare lenders and meticulously read all terms and conditions.
Another critical mistake involves damaging one's own credit profile. Applying to multiple lenders simultaneously triggers several hard inquiries, which can lower a credit score and signal "credit-hungry behaviour" to lenders. Neglecting your credit health before applying is also a problem, as a score below 750 can lead to higher interest rates or outright loan rejection. This harms your immediate chances of approval and future borrowing capacity.
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Many borrowers also fall into the trap of overborrowing. Tempted by generous approval limits, individuals often take out a larger loan than they actually need. This decision directly increases the monthly EMI, prolongs the repayment period, and puts an unnecessary strain on personal finances. Experts advise borrowers to "accurately and carefully understand their needs" to avoid taking on unmanageable debt.
The rise of digital lending has made instant personal loans more accessible than ever, offering a quick solution for urgent needs like medical emergencies or home repairs. This convenience, characterized by minimal paperwork and rapid approvals, also presents a significant risk. Uninformed borrowing, driven by ease of access, can quickly lead consumers into a cycle of debt if they are not aware of the long-term financial implications.
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To use instant loans effectively, experts stress the importance of informed and disciplined borrowing. Prospective borrowers should focus on building a strong credit profile, using online tools to compare offers, and borrowing only what is necessary. A thorough review of the loan agreement and transparent communication with the lender are key to maximizing savings and ensuring that a personal loan serves as a helpful financial tool rather than a long-term burden.
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