The biggest mistake to avoid when taking out a personal loan

Is Taking Out That Personal Loan a Big Mistake?

The biggest mistake to avoid when taking out a personal loan

Taking out a personal loan is often — but not always — a good idea. Watch out for these red flags when deciding if borrowing makes sense for you. 

Personal loans are often a good form of financing. They are unsecured, so you aren't putting assets at risk as collateral, and the interest rate tends to be lower than a credit card. Personal loans are also flexible because you can use the money you borrow for anything you want, including consolidating other debt.

But just because personal loans can be helpful, that doesn't mean it's always a good idea to take one out. In fact, in some circumstances, getting a personal loan could be a big mistake. This could be the case for you if any of the following things are true. 

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When you take out a personal loan, your monthly payments are determined the amount borrowed, the loan term, and your interest rate. If there is even a small chance you won't be able to afford the monthly payments for a loan you're considering, you absolutely shouldn't borrow.

Taking on a debt you aren't sure you can pay off is a recipe for disaster. If you pay late or don't pay at all, you could end up damaging your credit and incurring late payment fees.

If you fail to pay back your loan, you could also find yourself in court if the lender sues to collect — and this lawsuit could lead to wage garnishment or other dire consequences.


Looking for a personal loan but don't know where to start? The Ascent's picks of the best personal loans help you demystify the offers out there so you can pick the best one for your needs.

See the picks

Be sure you understand up front how much your personal loan payment will be, whether it might change, and how it will fit into your budget. If you have too little income and don't think you can pay the bill on time each month, walk away from the loan.

2. You're borrowing for a non-essential purpose

There is never a reason to borrow money for things you want but don't really need. If you borrow, you'll have to pay interest, which makes the purchase more expensive in the long run. The debt payments will also make it more difficult to live within your means.

While lenders market personal loans as the perfect way to pay for vacations, home upgrades, weddings, and big purchases, you should avoid taking on debt for any of these things. Instead, wait until you've saved up the cash to cover the costs and don't commit to years of payments for something that won't improve your financial situation over the long term.

3. You're borrowing to pay off debt but don't have your spending under control

Debt consolidation is a popular reason for taking out a personal loan and it can be a good one. If you owe a lot of high interest debt and you can take out a loan at a lower rate to pay it off, this may seem a no-brainer. 

Unfortunately, if you borrow to repay your debt but don't have your spending under control, you risk ending up in a worse financial position. If you use the personal loan to pay off your credit cards but then end up charging them up again, you'll have both the loan and credit card bills to pay.

To make sure this doesn't happen, create a budget and live on it for a little bit. That way you'll know you won't reach for the credit cards you've just paid off with borrowed funds from a personal loan.

4. You're borrowing from a lender offering bad terms

While personal loans generally have reasonable interest rates that are lower than credit cards, this isn't always the case. Some loans that cater to bad credit borrowers can be very expensive.

And some lenders market loans as personal loans when they're essentially just payday loans by another name.


Want to pay off debt faster? Check out our shortlist of the best personal loans for debt consolidation and cut your monthly payment with a lower rate.

Pay off debt faster

Make sure you know the interest rate, fees, repayment timeline, and monthly payment before you agree to any personal loan. If the rate is high, or you’ll be stuck paying the loan for a very long time, or there are exorbitant fees, it’s better not to borrow. 

Don't end up making a big mistake when it comes to taking out a personal loan

If you can't find a loan at a reasonable rate, if you're borrowing for something you don't really need, or if there's a chance you can't afford the monthly payments, you should absolutely not take out a personal loan. Doing so would be a major mistake that could ruin your credit, cost you a fortune, and undermine your financial security for a long time to come. 

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7 Personal Loan Mistakes To Avoid This Season

The biggest mistake to avoid when taking out a personal loan

Getting approved for a personal loan always feels great. Whether it’s used to pay off debt, fund a holiday vacation, or invest in home improvements, fact is, it puts money in your pocket. The key is to be responsible and avoid the potential pitfalls that come with taking out a loan so you can remain in good financial standing.

In this article, we'll cover seven of the most common personal loan mistakes out there to help you navigate the process this season.

#1 Focusing Only on The Monthly Payments

While looking at monthly payments will offer you a quick way to compare loan offers against one another, they shouldn't be the final say on whether or not you choose a particular provider.

For one thing, monthly payments aren't the only cost associated with getting a loan. There are origination fees, application fees, late fees, and interest rates to consider.

Oftentimes loan providers will use low monthly payments to disguise some of these other feeds.

You could also end up getting a low monthly payment that lasts for several years, making the loan a longer commitment than you originally had in mind.

And secondly, monthly payments do not take into account the reputability of the financial institution you are borrowing from. Knowing who you are paying is just as important as knowing what you are paying. You can determine if a lender is being transparent by their customer reviews, history as a provider, and the additional services they offer ( free resources and customer support).

#2 Not Checking Your Credit Report First

It’s also important to keep in mind that that credit score plays a big role in the loan application process. It will affect your loan and your loan will affect it.

That’s not to say that they will negatively affect each other, exactly. In fact, getting a personal loan can be one of the best things you can do for your credit score.

You can use it to consolidate debt and improve your credit score through timely payments.

And if you already have a high credit score, you'll be able to secure lower interest rates when applying for a loan, saving you money in the long run.

In some cases, a low credit score can work against your loan application process. Having a low score will limit the amount of money you can qualify for and raise the interest rate of your loan. If you have a lower credit score and don't need a personal loan right away, consider taking some extra time to raise your score before going through the loan application process.

#3 Using or Applying for Credit Shortly Before Getting A Loan

Another common personal loan mistake related to credit score is making a big purchase on your credit shortly before applying for a loan.

Buying a car or house on credit during or before the loan application process might hurt your chances of qualifying for the loan.

If a provider sees that you are spending more on credit than you will reasonably be able to repay, they may withdraw or change your loan terms before they're finalized.

Additionally, attempting to make multiple substantial purchases on your credit in a short period of time can have a negative impact on your credit score. It's always best to focus on one loan at a time—for both your credit score and peace of mind.

#4 Making Late Payments

It may seem obvious, but making late payments on your personal loan is a fast way to rack up financial stress. Most loan providers will have late fees in place for borrowers that miss their payment due date. This increases the cost of the loan without increasing the amount of money you get from the loan. Not only that, but missing payments negatively impact your credit score.

One of the easiest ways to ensure that you don't miss monthly loan payments is to set up automatic payments if your provider allows it. Some providers may even offer lower monthly payments to borrowers that use automatic payment methods. You can also set up a calendar reminder to help you stay on top of payments.

#5 Not Budgeting for The Loan Payments

Speaking of not making monthly payments on time, another personal loan mistake that borrowers make is neglecting to set a budget for their new loan.

Even if you've never made a budget before, creating one for your loan repayment is an important part of the process.

It'll help you decide how much you can afford to pay each month, how quickly you can repay the loan, and how much you can afford to borrow.

Setting a flexible, accurate budget will relieve much of the stress associated with purchasing and repaying a loan, and prevent late payments along the way.

#6 Applying For The First Loan You Find

It can be tempting to grab the first loan that you qualify for when shopping for a personal loan online, but doing so means that you could be missing out on a better deal. Keep in mind that a loan is a financial commitment. The more time you spend picking the right provider, the happier you will be with that commitment.

When shopping for a personal loan, it's helpful to compare the APR and monthly fees of each provider. The APR is a percentage that includes all fees associated with the loan, making it a great way to determine the final cost of a loan without having to worry over hidden fees. Some providers even offer a personal loan calculator that makes comparing loans as simple as a few clicks.

#7 Overlooking The Fine Print

Last but not least, take the time to read the fine print before applying for a personal loan. The last thing you want is to be two years into repaying a loan only to realize that there was a condition or penalty that you were unaware of.

Reading the fine print of a contract is also a great way to check if a provider is being transparent with their offer. If they make claims that aren't supported or are contradicted by the loan contract, ask for clarification and consider switching providers before final agreements have been made.

Personal Loan Mistakes: The Bottom Line

The loan application can often be an intimidating and even stressful process, but don’t let it be! A personal loan can bring financial relief if it’s done responsibly—by understanding everything involved in the process so you can avoid common mistakes.

The key takeaway here is to give yourself plenty of time to make your decision, plan carefully, and weigh your options with a clear head so you'll be able to set yourself up for financial success.

Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances.

 The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances.

The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.


12 First-Time Home Buyer Mistakes and How to Avoid Them

The biggest mistake to avoid when taking out a personal loan

Every year, first-time home buyers venture into the market and make the same mistakes that their parents, siblings and friends made when they bought their first houses.

But today’s novice buyers can stop the cycle. Here are 12 mistakes that first-time home buyers make — and what to do instead.

Get answers to questions about your mortgage, travel, finances — and maintaining your peace of mind.

1. Not figuring out how much house you can afford

Without knowing how much house you can afford, you might waste time. You could end up looking at houses that you can't afford yet, or visiting homes that are below your optimal price level.

For many first-time buyers, the goal is to buy a house and get a loan with a comfortable monthly payment that won't keep them up at night. Sometimes it's a good idea to aim low.

How to avoid this mistake: Use a mortgage affordability calculator to help you know what price range is affordable, what's a stretch and what's aggressive.

» CALCULATE: How much house can I afford?

2. Getting just one rate quote

Shopping for a mortgage is shopping for a car or any other expensive item: It pays to compare offers. Mortgage interest rates vary from lender to lender, and so do fees such as closing costs and discount points.

“Mortgage applications within 45 days count as one credit inquiry.”

But according to the Consumer Financial Protection Bureau, almost half of borrowers don't shop for a loan.

» MORE: 5 tips for finding the best mortgage lenders

How to avoid this mistake: Apply with multiple mortgage lenders. A typical borrower could save $430 in interest just in the first year by comparing five lenders, NerdWallet finds. All mortgage applications made within a 45-day window will count as just one credit inquiry.

3. Not checking credit reports and correcting errors

Mortgage lenders will scrutinize your credit reports when deciding whether to approve a loan and at what interest rate. If your credit report contains errors, you might get quoted an interest rate that's higher than you deserve. That's why it pays to make sure your credit report is accurate.

See your free score anytime, get notified when it changes, and build it with personalized insights.

4. Making a down payment that's too small

You don't have to make a 20% down payment to buy a home. Some loan programs (see item No. 5) enable you to buy a home with zero down or 3.5% down. Sometimes that's a good idea, but homeowners occasionally have regrets.

In a survey commissioned by NerdWallet, one in nine (11%) homeowners under age 35 agreed with the statement “I should have waited until I had a bigger down payment.” It was one of the most common regrets that millennial homeowners had.

“The key is making sure your down payment secures an affordable monthly house payment.”

How to avoid this mistake: Figuring out how much to save is a judgment call. A bigger down payment lets you get a smaller mortgage, giving you more affordable monthly house payments.

The downside of taking the time to save more money is that home prices and mortgage rates have been rising, which means it could become more difficult to buy the home you want and you may miss out on building home equity as home values increase.

The key is making sure your down payment helps you secure a payment you’re comfortable making each month.

» MORE:  Down payment strategies for first-time home buyers

In another survey commissioned by NerdWallet, millennial homeowners described how long it took to save for a down payment. Among millennials who had bought a home in the previous five years, it took an average of 3.75 years to save enough to buy. So if it's taking you three or four years to save up, you have plenty of company.

» MORE: How to figure out the right down payment amount for you

5. Not looking for first-time home buyer programs

As a first-time home buyer, you probably don’t have a ton of money saved up for the down payment and closing costs.

But don’t make the error of assuming that you have to delay homeownership while saving for a huge down payment.

There are plenty of low-down-payment loan programs out there, including state programs that offer down payment assistance and competitive mortgage rates for first-time home buyers.

Yes, 11% of millennial homeowners say they regret not making a bigger down payment. But the vast majority don't express such a regret.

» MORE: Learn about first-time home buyer resources in your state

How to avoid this mistake: Ask a mortgage lender about your first-time home buyer options and look for programs in your state. You might qualify for a U.S.

Department of Agriculture loan or one guaranteed by the Department of Veterans Affairs that doesn’t require a down payment. Federal Housing Administration loans have a minimum down payment of 3.

5%, and some conventional loan programs allow down payments as low as 3%.

» MORE: Find a first-time home buyer program that’s right for you

6. Ignoring VA, USDA and FHA loan programs

A lot of first-time home buyers want to or need to make small down payments. But they don't always know the details of government programs that make it easy to buy a home with zero or little down.

How to avoid this mistake: Learn about the following loan programs:

  • VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs. They're for people who have served in the military. VA loans' claim to fame is that they allow qualified home buyers to put zero percent down and get 100% financing. Borrowers pay a funding fee in lieu of mortgage insurance.» MORE: The basics of VA loans
  • USDA loans can be used to buy homes in areas that are designated rural by the U.S. Department of Agriculture. Qualified borrowers can put zero percent down and get 100% financing. You pay a guarantee fee and an annual fee in lieu of mortgage insurance.» MORE: What you need to know about USDA loans
  • FHA loans allow for down payments as small as 3.5%. What's more, the Federal Housing Administration can be forgiving of imperfect credit. When you get an FHA loan, you pay mortgage insurance for the life of the mortgage, even after you have more than 20% equity.» MORE: All about FHA loans

7. Not knowing whether to pay discount points

Mortgage discount points are fees you pay upfront to reduce your mortgage interest rate. Interest rate savings can add up to a lot of money over the life of a mortgage, and discount points are one way to gain those rate savings if you’re in the right position to purchase them.

How to avoid this mistake: If making a minimal down payment is an accomplishment, the choice is simple: Don't buy discount points.

If you have enough cash on hand, the value of buying points depends on whether you plan to live in the home longer than the “break-even period.

” That's the time it takes for the upfront cost to be exceeded by the monthly savings you get from a lower interest rate.

» MORE: Calculate whether you should pay for discount points

8. Emptying your savings

If you buy a previously owned home, it almost inevitably will need an unexpected repair not long after. Maybe you’ll need to replace a water heater or pay a homeowner's insurance deductible after bad weather.

“That’s a growing pain for the first-time homeowner, when stuff breaks,” says John Pataky, executive vice president of the consumer division of EverBank. “They find themselves in a hole quickly,” if they don't have enough saved for emergencies.

» MORE: How to save for a down payment

How to avoid this mistake: Save enough money to make a down payment, pay for closing costs and moving expenses, and take care of repairs that may come up. Lenders will give you estimates of closing costs, and you can call around to get estimates of moving expenses.

» MORE: Calculate how long it will take you to save for a down payment

9. Applying for credit before the sale is final

One day, you apply for a mortgage. A few weeks later, you close, or finalize, the loan and get the keys to the house. The period between is critical: You want to leave your credit alone as much as possible. It’s a mistake to get a new credit card, buy furniture or appliances on credit, or take out an auto loan before the mortgage closes.

“Wait until after closing to open new credit accounts or charge big expenses to your credit cards.”

Here’s why: The lender’s mortgage decision is your credit score and your debt-to-income ratio, which is the percentage of your income that goes toward monthly debt payments.

Applying for credit can reduce your credit score a few points. Getting a new loan, or adding to your monthly debt payments, will increase your debt-to-income ratio.

Neither of those is good from the mortgage lender’s perspective.

» MORE: Why debt-to-income ratio matters

Within about a week of the closing, the lender will check your credit one last time. If your credit score has fallen, or if your debt-to-income ratio has gone up, the lender might change the interest rate or fees on the mortgage. It could cause a delay in your closing, or even result in a canceled mortgage.

How to avoid this mistake: Wait until after closing to open new credit accounts or to charge furniture, appliances or tools to your credit cards. It’s OK to have all those things picked out ahead of time; just don’t buy them on credit until after you have the keys in hand.

» MORE: What not to do during mortgage approval

10. Shopping for a house before a mortgage

It’s more fun to look at homes than it is to talk about your finances with a lender.

So that’s what a lot of first-time home buyers do: They visit properties before finding out how much they are able to borrow.

Then, they are disappointed when they discover they were looking in the wrong price range (either too high or too low) or when they find the right home, but aren’t able to make a serious offer.

» MORE: Calculate the estimated value of a home you're interested in

How to avoid this mistake: Talk to a mortgage professional about getting pre-qualified or even preapproved for a home loan before you start to seriously shop for a place. The pre-qualification or preapproval process involves a review of your income and expenses, and it can make your bid more competitive because you’ll be able to show sellers that you can back up your offer.

Neal Khoorchand, broker-owner of Century 21 Professional Realty in the South Ozone Park neighborhood of Queens, New York, pre-qualifies his clients before showing them properties.

“If you’re qualified for a one-family house for $500,000, we’re not going to show you a one-family for $600,000 — it would be a waste of time,” he says.

» MORE: What a preapproval is and why it matters

11. Underestimating the costs of homeownership

After you buy a home, the monthly bills keep stacking up. This can come as a surprise if you’re not ready.

“It’s not just your mortgage payment,” says Seth Feinman, vice president of Silver Fin Capital, a mortgage brokerage in Great Neck, New York. “You’re going to have the oil bill, the gas bill, you’re going to have a cable bill, you’re going to have all these things that the bank doesn’t care about when qualifying you for a mortgage.”

Renters often pay these kinds of bills, too. But a new home could have higher costs — and it might come with entirely new bills, such as homeowner association fees.

How to avoid this mistake: Work with a real estate agent who can tell you how much the neighborhood’s property taxes and insurance typically cost. Ask to see the seller’s utility bills for the last 12 months the home was occupied so you have an idea how much they will cost after you move in.

» MORE: Calculate the real costs of owning a home

12. Miscalculating repair and renovation costs

First-time home buyers are frequently surprised by high repair and renovation costs. Buyers can make two mistakes: First, they get a repair estimate from just one contractor, and the estimate is unrealistically low. Second, their perspective is distorted by reality TV shows that make renovations look faster, cheaper and easier than they are in the real world.

How to avoid this mistake: Assume that all repair estimates are low. James Ramos, owner of Re/Max Bay to Bay, a real estate brokerage in Tampa, Florida, recommends doubling the estimates to get a more realistic view of costs.

Seek more than one estimate for expensive repairs, such as roof replacements. A good real estate agent should be able to give you referrals to contractors who can give you estimates. But you also should seek independent referrals from friends, family and co-workers so you can compare those estimates against ones you receive from contractors your agent refers.

» MORE: Why you should budget for repairs even before you buy


The biggest mistake to avoid when taking out a personal loan

The biggest mistake to avoid when taking out a personal loan

In the past few months, the coronavirus pandemic has taken a heavy toll on many Americans’ finances, with roughly 42 million people forced to file unemployment claims. During these tough times, many of those individuals have found themselves turning to a personal loan to provide them with the funds that they need to get by until they receive their next paycheck.

If you’ve also thought about going this route, one of the biggest mistakes that you can make with your money is forgetting to shop around for the best rate on your loan. Thanks to tools Credible, it’s easy to compare rates and lenders in order to make sure you’re getting the most bang for your buck.

However, if you need more proof as to why rate shopping matters, keep reading to see just how much you can save.

Why rate shopping makes a difference

Essentially, if you don’t take the time to shop around for the best loan rate, especially now during coronavirus when we’re seeing record interest rates, there’s a good chance that you’ll end up paying more than you need to for the privilege of borrowing money.

Put simply, personal loans come with a lot of flexibility in terms.

For example, while personal loan amounts typically range from $1,000 to $50,000, it is possible to get a personal loan worth up to $100,000.

 To see what kind of rates you qualify for with your credit history, enter your desired loan amount into Credible's online marketplace and compare offers from lenders almost instantly.


Interest rates can vary greatly, too. According to Experian, the rates on these loans can range from 6 percent to 36 percent. In general, those with the best credit scores are given the lowest rates because lenders see them as less of a risk.

That said, every personal loan rate is different. Each lender will decide on their own interest rate for you their perception of your creditworthiness. With that in mind, shopping around gives you a chance to find the lowest rate available to you.

The benefit of rate shopping: an example

Whether you’re shopping for a personal loan or student loan, you should always select the option with the lowest interest rate because it will save you money in the long run. Though a difference as small as one percentage point may seem negligible on paper, it can make a substantial difference in how much you pay over time. Consider the following comparison between two loans:


Loan A: Loan A is worth $10,000. It has an interest rate of 10 percent and a five-year loan term. With this loan, your monthly payment would be $212.47 and you would pay a total of $12,748.23 over the five years, of which $2,748.23 would be interest paid.

Loan B: Loan A, Loan B is worth $10,000 and has a five-year loan term. However, Loan B has an 11 percent interest rate. In this case, you would pay $217.42 each month and $13,045.45 over the five years, which amounts to $3,045.45 paid in interest.

If you were given the choice between these two loans, Loan A would be the obvious choice because it would save you nearly $300 overall.

The difference between rate shopping and applying for multiple accounts 

Sometimes people avoid shopping around for a loan — even if it means sacrificing their opportunity for low rates —  because they’re worried that doing so will negatively impact their credit score.

While it’s true that having too many hard inquiries on your credit report at one time can lower your score, shopping around for low-interest rates on a personal loan won’t necessarily have this effect.

For one thing, some lenders only need to do a soft credit inquiry to give you a ballpark interest rate on a personal loan. Soft inquiries don’t damage your score and the lender wouldn’t need to perform a hard credit inquiry until it was actually time to approve you for the loan.


Also, credit scoring models treat inquiries related to rate shopping differently. As long as multiple inquiries happen within the same period of time and are for the same purpose, they’ll be counted as a single shopping event.

Keep in mind that the acceptable time period for rate shopping will vary by scoring model. For instance, FICO’s scoring model allows for a 45-day rate shopping window while VantageScore’s window is only 14 days.

The bottom line 

By now, it should be clear that rate shopping can have a substantial impact on how much interest you end up paying on a personal loan. With that in mind, if you’re ready to start shopping around for a personal loan, visit Credible to easily compare rates and lenders today.



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