Here are a few mistakes millennials are likely to commit while availing loans and how to avoid them
Loans, be it the ‘one minute payday loan’ availed via phone or a home loan taken after a lot of running around, are an integral part of the money matters of millennials. With the spread of internet there are many things that are growing at breakneck speed in India and retail credit is definitely occupying one of the top slots on the list. Millennials are the driving factors when it comes to incremental loan demand. Here are a few mistakes millennials are likely to commit while availing loans and how to avoid them.Ignorance on costs
“Many borrowers focus on absolute numbers and they do not have any idea of the interest payable in percentage terms,” says Satyam Kumar, Founder and Executive Director of LoanTap. Many a times lenders build in interest costs in one-time processing fee. The zero interest payable deal makes many opt for one, without giving it a second thought. Sometimes the costs incurred as a fee are as high as 2-4 percent for a loan payable in a month, which in no way a great deal at all.
Borrowers must spend some time understanding the costs in percentage terms. Many a time the lenders quote interest rates in flat rate terms. One should ask for a monthly reducing rate of interest. If you are getting confused with the numbers, it is better to use an online EMI calculator to verify lender’s claims.
In a hurry to access credit, many borrowers forget to understand the other terms and conditions. In an app-based borrowing environment, a person ends up simply clicking the checkboxes as an acceptance of the terms and conditions without even reading them. Ignorance of these may hit you really hard. For example, some loans do charge high pre-payment penalties. If you know these terms you can negotiate a better deal at the time of availing a loan and plan your re-payments accordingly.
“Each loan agreement comes with a schedule containing all charges. If you have not received the agreement, do ask for one and go through the schedule,” Kumar says.Data privacy
In an online environment, the loan disbursal is quick thanks to the online fulfilment of know your customer (KYC) norms. It also means you have to upload a host of documents along with your income statements. With the advent of a smartphone armed with a good camera this is not a big deal. But this leaves a lot of information with the lender. “Do not share documents just because it is easy to do so. Your data privacy is important and you must share only the information which is material to your loan,” Kumar explains.Not comparing the offers from competition
“Easy availability of loans make many grab the first available opportunity irrespective of their need,” says Ranjit Punja, Founder and CEO of CreditMantri. A few years back, online aggregators were the buzzword. These are online marketplaces where one can compare and buy the right loans. Smartphones and digital marketing have been more persuasive. Many times an SMS or email offering a great deal on loan makes many quickly opt for one. The compare stage of the borrowing process is dropped and it may cost you a lot.Over borrowing and erratic repaymentsPunja explains that many individuals stretch themselves thin just because there is a loan available. For instance, one may not spend Rs 60,000 on a smartphone, but will definitely buy one if offered a yearly EMI option of Rs 6,000. Many such luxuries become accessible just because one can borrow. This leads to inability of servicing loans on time.
“If you fail to repay your loans as per the repayment schedule, your credit score is impacted. In a short span of time if you apply for too many loans, then your credit score might be negatively impacted,” Punja explains. For the uninitiated, the credit score captures the loan repayment track record of an individual. Higher the number better it is. If you have a credit score in excess of 750, there is a high chance that lenders will offer you a better deal.
“When you are borrowing, remember that you have to pay it back,” Kumar cautions. “You should ensure that not more than 30 percent of your income should go towards servicing your loans.” Do not run away from your loans. If over-borrowing has led you into a debt trap, do talk with your lenders and ask for a consolidated loan. This will let you repay your accumulated loans, over a longer timeframe.Punja sums it up best: “Borrow only when you need too, not because it is available. Always start small and see to it that you repay your loans.”