Loan paperwork to be signed.

How To Avoid Personal Loan Mistakes

Personal loans are great financial tools, but like all financial tools, they can be misused. If you are in the market for a personal loan, read this article about common mistakes that people make. Try to avoid them and keep your finances in good order.

A personal loan is a type of loan that allows you to borrow money from a bank or a financial institution to use for your personal needs.

The most common mistakes people make when taking out a personal loan are not understanding the terms and conditions of their loan, not getting enough information about their interest rates and fees, and not comparing loans from different lenders.

There are three types of loans: secured loans, unsecured personal loans, and payday loans. People often unknowingly take out a loan that has an interest rate that is higher than they expected or different terms.

Unsecured personal loans offer a quick and easy form of repayment, but have high rates and fees, which can be hard to pay off. They are also harder to get because without collateral you’ll need a very good credit score in order to qualify.

Secured personal loans offer lower rates and fees, with the downside that you’ll have to put up your collateral. This is generally not a big problem however, because most times the collateral will be what the loan was used to buy. For example, a home is the collateral on a mortgage and your car is the collateral on an auto loan.

Payday loans offer the shortest repayment period and are offered with a high interest rate in exchange for their quick turnaround time. These are the classic bad credit emergency loan and just about anybody will have the ability to qualify for them.

Steps You Need to Take to Avoid Personal Loan Mistakes

Personal loans are a good way to get cash for a short or long term need. But if you’re not careful, you may end up in debt for years. We’ve compiled a list of a few steps to avoid personal loan mistakes.

Step 1: Identify Your Budget

During the loan approval process, your lender will try to determine just how much you can qualify for and afford to pay back. They are fairly good at doing so, but often come up high.

Only you can really determine how much you can comfortably afford because you know what your spending habits are. For example, a lender might determine that you can afford an 2500 dollar a month mortgage payment, but this may not take into account your cash spending habits that might take you over budget.

Before you accept a loan, calculate just how much you can comfortably pay each month and then shop for your loan accordingly.

Step 2: Know Your Credit

If you do not know your credit score, you may take a loan that is too costly. By knowing your score in advance, you will be able to identify a loan that is appropriate.

In addition, if you know your credit, you will know what can be worked on. There are often minor things that you can change that may have a major affect on your score. This could be as simple as paying down a couple hundred dollars in debt or disputing an error.

Step 3: Get Your Documents In Order

If you want a smooth loan process, you should anticipate what your lender will require and have it ready. You will most commonly need documents such as W2’s, income tax returns and bank statements.

Have both paper and digital copies of these documents on hand so that you can speedily hand them over. There is no better way to get on the good side of a loan underwriter than to be “Johnny On The Spot” with important documents.

Step 4: Shop Your Loan Around

A personal loan is a big deal and you should not shop it with just a single lender. Lender rates can vary greatly and not shopping your rate around can cost you hundreds or even thousands of dollars over the course of a loan.

You might be wary of shopping your loan around because you have heard that excess credit inquiries can harm your credit score. While this is true, multiple inquiries around the same time are generally considered as just one. This is because it is generally known that borrowers will shop their rate.

Step 5: Be Realistic

When it comes time to make a major purchase, borrowers can be very unrealistic at times.

You might think that you can afford a loan payment or that the cost is worth it, but you could be wrong. The problem is that once you sign a loan contract, you are stuck with it.

Before you commit to a personal loan, picture yourself making the payment month after month. Take the potential loan payment out of your budget and try to live on the money that is left over. This will give you a realistic idea of what life will be like living with a loan.

Identifying A Good Loan

There are a lot of factors that go into deciding whether or not a loan is a good loan. Interest Rate

One of the simplest ways to ID a good loan is to look at the interest rate. The interest rate will have the biggest impact on your actual loan payment, but the lowest interest loan is not always the best one.

A better indicator is the APR which takes into account not only the loan interest rate, but also all fees. This is a great way to compare different loans hat might have slightly different interest rates.

Loan Term

Your loan term will affect the monthly payment amount. The longer the term, the lower the payment. At the same time, you must realize that the longer the term, the longer you will be charged interest.

A borrower should try to choose a term that gives them the payment they desire and is not unnecessarily long.


Fees can really sneak up on you with a personal loan. The most common ones that a borrower will face are origination fees and late fees. Origination fees will be calculated in your APR, but late fees will not. You probably never plan on making a late payment, but things happen. Make sure that if the worst were to happen that you would not get taken advantage of by exorbitant late fees.

Posted by

James Car is a finance, loan and budget expert based in the United States. After attending Brookhaven college, he went on to become a successful entrepreneur. He now enjoys writing articles that help people save and make the most of their money.