10 Mistakes to Avoid While Taking a Personal Loan

Personal loans are one of the most popular credit options in India, thanks to their easy availability, quick disbursal, and no requirement for collateral. Whether it's to cover medical expenses, manage a wedding, fund a dream vacation, or consolidate high-interest debt, a personal loan can be a useful financial tool.

But, if not used wisely, it can also become a financial burden. Many borrowers rush into loans without understanding the terms, resulting in stress, high interest payments, or even damage to their credit score.

Here are 10 common mistakes to avoid while taking a personal loan so you can borrow smart and stay financially secure.

1. Not Comparing Loan Offers

One of the biggest mistakes is taking a loan from the first lender you come across. Interest rates, processing fees, tenures, and prepayment terms vary from lender to lender.

Tip: Use loan comparison tools or aggregator websites to evaluate offers from multiple banks and NBFCs. Even a 1% difference in interest rate can save you thousands over the loan tenure.

2. Ignoring the Interest Rate Type

Not all personal loans have fixed interest rates. Some may come with floating interest, which can increase over time depending on market trends.

Tip: Ask whether the loan has a fixed or variable rate. Fixed rates offer predictability, while floating rates might be riskier over the long term.

3. Borrowing More Than You Need

It's tempting to take a higher loan amount just because you're eligible for it. But larger loans mean higher EMIs and more interest.

Tip: Calculate your actual need and borrow only what is essential. This will reduce repayment stress and total interest outflow.

4. Choosing the Wrong Loan Tenure

Some people pick long tenures to reduce their EMIs, while others choose short terms to close the loan quickly. Both have trade-offs.

• Longer tenure = lower EMI, but higher total interest
• Shorter tenure = higher EMI, but lower total interest

Tip: Choose a tenure that balances affordability with interest savings.

5. Ignoring Your Credit Score

Your credit score directly affects your loan approval and interest rate. A low score can result in rejection or higher interest charges.

Tip: Check your credit score before applying. If it’s below 700, consider improving it before taking a loan.

6. Not Reading the Fine Print

Many borrowers skip reading the full terms and conditions, which can lead to surprise charges like:

• Late payment penalties
• Prepayment or foreclosure fees
• Insurance charges bundled with the loan.

Tip: Read the loan agreement carefully and clarify any doubts with the lender before signing.

7. Overlooking Processing and Hidden Fees

Apart from interest, lenders may charge:

• Processing fees (usually 1%–2.5%)
• Documentation charges
• GST on fees
• Loan cancellation or bounce charges

Tip: Factor in all these additional costs while comparing offers. A loan with a lower interest rate but higher fees may not always be cheaper.

8. Applying with Multiple Lenders Simultaneously

Applying for personal loans with many lenders at once can hurt your credit score due to multiple hard inquiries.

Tip: Use loan comparison tools that offer “soft checks” without affecting your credit score. Apply with 1–2 preferred lenders only.

9. Using the Loan for Non-Essential Spending

Using personal loans for lifestyle upgrades or non-essential expenses like gadgets, luxury vacations, or impulsive shopping can strain your budget.

Tip: Reserve loans for genuine needs  such as medical emergencies, education, or debt consolidation  where the benefits outweigh the costs.

10. Missing or Delaying EMIs

Late or missed EMI payments can result in:

• Penalty charges
• Lower credit score
• Difficulty in getting future loans

Tip: Set up auto-debit or reminders to ensure timely repayment. If you're facing temporary financial issues, inform your lender and explore restructuring options.

Final Thoughts

Taking a personal loan is a serious financial decision. It can help you when used wisely but can also lead to long-term debt if handled poorly. By avoiding these common mistakes, you can make smarter borrowing decisions and ensure the loan works in your favour.

Before you apply:

• Assess your real financial need.
• Compare lenders.
• Understand all charges and terms.
• Choose tenure wisely.
• Stay committed to repayment.

Personal loans should simplify your financial life, not complicate it. The key is to plan, evaluate, and borrow responsibly.