A personal loan can be a powerful financial tool, whether you’re consolidating debt, covering emergency expenses, or funding a major purchase. However, making the wrong decisions can lead to high costs, financial stress, and unnecessary debt.

To help you borrow smartly, this guide highlights the most common mistakes people make when taking out a personal loan—and how to avoid them.

Borrowing More Than You Need

Many lenders approve loan amounts higher than what borrowers actually need. While it may seem tempting to take a larger loan, doing so increases monthly payments and the total interest paid, leading to overspending and unnecessary debt.

The best way to avoid this mistake is to calculate exactly how much you need before applying. Using a loan calculator can help determine a manageable monthly payment that fits within your budget.

For example, borrowing $15,000 at a 10% APR for five years results in a $318 monthly payment and $4,075 in total interest. Borrowing only $10,000 instead would save $2,717 in interest over the same term.

Not Checking Your Credit Score Before Applying

Your credit score directly impacts your interest rate and loan approval chances. Applying without checking your score can result in higher rates or loan denial, and multiple rejections can lower your credit score further.

To avoid this, check your credit score for free at AnnualCreditReport.com. If your score is low, improve it before applying by paying off debts and making on-time payments.

A borrower with excellent credit (750+) might secure a loan with a 5% – 10% APR, while someone with a poor credit score (580 – 649) could face rates as high as 36%. The difference between an 8% and 20% APR on a $10,000 loan can mean paying over $2,000 extra in interest.

Ignoring Loan Fees & Hidden Costs

Many borrowers focus only on interest rates and overlook additional fees that can make a loan significantly more expensive. Common hidden costs include origination fees, which range from 1% – 8% and reduce the amount you receive, prepayment penalties for paying off the loan early, and late fees if payments are missed.

To avoid these unnecessary costs, choose lenders that offer transparent terms with minimal fees. Read the loan agreement carefully before signing to ensure you understand all costs involved.

For example, taking out a $10,000 loan with a 5% origination fee means you would only receive $9,500, but you would still owe $10,000 plus interest.

Choosing a Long Loan Term Without Considering Interest Costs

Longer loan terms often result in lower monthly payments, but they also increase the total interest paid over time. A five-year loan typically costs significantly more in interest than a three-year loan.

To minimize interest costs, choose the shortest loan term you can afford while maintaining manageable monthly payments.

For example, a $10,000 loan at 8% APR over three years would result in total interest of $1,268, while the same loan over five years would cost $2,176 in interest—almost double the amount.

Not Shopping Around for the Best Loan Offer

Many borrowers apply with the first lender they find without comparing options. This can lead to higher interest rates and fees, as different lenders offer different terms.

To secure the best deal, compare at least three lenders before making a decision. Using prequalification tools allows you to check rates without affecting your credit score.

For instance, SoFi offers loans with APRs ranging from 8.99% – 25.81%, while LightStream provides rates as low as 6.99%. Online comparison platforms like LendingTree and Credible can help borrowers find the best rates in minutes.

Not Reading the Loan Agreement Carefully

Signing a loan agreement without fully understanding the terms can lead to unexpected fees, rate increases, or repayment restrictions. Some lenders include clauses that penalize borrowers for early repayment or impose fees that were not clearly disclosed.

To avoid surprises, read the full loan agreement carefully, focusing on fees, repayment terms, and penalties. If anything is unclear, ask the lender for clarification before signing. Never proceed with a loan if the terms seem suspicious or overly complex.

Taking a Loan Without a Repayment Plan

A personal loan is not free money—it must be repaid on time to avoid financial stress. Missed payments result in late fees, damage your credit score, and make future borrowing more difficult.

Setting up automatic payments can help ensure on-time payments and prevent missed due dates. Creating a budget that includes loan payments will also help maintain financial stability. If you have multiple loans, using the Debt Snowball or Avalanche method can help you pay them off strategically.

Conclusion

A personal loan can be a smart financial tool, but only if used wisely. Checking your credit score before applying, comparing lenders, avoiding hidden fees, choosing a reasonable loan term, and having a solid repayment plan are all essential steps to borrowing responsibly.

By avoiding these common mistakes, you can save money, reduce stress, and make the most of your loan.

Frequently Asked Questions (FAQs)

What’s the biggest mistake people make when taking out a personal loan?
Borrowing more than they need and ignoring hidden fees.

How do I know if I’m getting a good deal?
Compare at least three lenders and choose the lowest APR with no hidden fees.

Will applying for multiple loans hurt my credit score?
Only if you submit multiple applications at once. Using prequalification tools first allows you to compare rates without affecting your credit score.