Taking a personal loan is a big financial step that can help you handle many situations, such as combining your debts, paying for a large purchase, or dealing with a sudden emergency.
However, if you rush into taking a loan without properly understanding the terms or planning your repayment, you could end up spending much more than expected. This can cause long-term financial stress and lead to more debt.
To help you avoid the common pitfalls that people face with personal loans—such as choosing the wrong loan terms or borrowing more than you can manage—we’ve put together a detailed list of what not to do when applying for a personal loan.
10 Mistakes You Should Avoid When Taking a Personal Loan
1. Ignoring the Importance of Your Credit Score
Your credit score acts like a report card of your financial behavior. It’s one of the main things lenders look at before approving your loan and deciding what interest rate to offer.
If your credit score is low, you may either be charged a much higher interest rate or be rejected altogether. Before you apply for any loan, check your credit score and work on improving it by paying off debts and clearing any outstanding bills.
2. Applying for Multiple Loans or Credit Cards at the Same Time
It may seem like a good idea to increase your chances by applying to several banks or lenders, but this can backfire. Each time you apply for credit, it triggers a “hard inquiry” on your credit report, and multiple inquiries can lower your score.
Lenders might also see this as a sign that you’re desperate or not managing your finances well. Instead of applying everywhere at once, take time to research and choose the best loan option that fits your needs.
3. Choosing a Short Loan Term for a Large Loan
Short-term loans usually come with higher monthly payments. While it might seem like a good idea to repay your loan quickly, it could put pressure on your monthly budget—especially if the loan amount is large. Always balance your desire to finish repaying quickly with what you can realistically afford each month.
4. Overusing Instalment Payment Plans (IPPs)
When you rely too much on monthly installment plans for purchases, it increases your regular financial obligations.
Banks and licensed lenders evaluate how much of your income is already committed before approving new loans.
If a big chunk of your salary is going toward these IPPs, lenders may doubt your ability to repay another loan, making them more likely to reject your application.
5. Borrowing More Than You Really Need
Taking a larger loan than necessary might feel safer in the short term, but it will cost you much more in the long run. Interest is calculated on the total loan amount, so borrowing extra means you’ll pay more interest overall.
Additionally, a bigger loan increases your debt-to-income ratio, which can negatively affect your credit score and future borrowing potential.
6. Accepting the First Loan Offer Without Comparing
One of the most common mistakes is saying yes to the first “attractive” loan deal you find. Not all lenders offer the same interest rates or terms.
Some might offer lower rates in the beginning, but increase them later. Others may have hidden fees or rigid terms.
Comparing different lenders—using online tools or financial comparison sites—can help you find the best deal that suits your financial situation.
7. Not Reviewing Your Credit Report Frequently
Your credit report gives a full picture of your financial habits, including any existing debts. In Singapore, the Credit Bureau Singapore (CBS) maintains these records.
Regularly checking your credit report helps you stay on top of your finances and spot any errors that might hurt your loan applications.
It also shows you where you stand before taking on new debt. Remember, lenders will definitely look at this report before deciding whether to approve your loan.
8. Missing or Delaying Your Loan Repayments
Late payments don’t just come with late fees—they also damage your credit score. In Singapore, missed payments are recorded by CBS and are visible to all future lenders.
Even one missed payment can impact your ability to get a loan later. Always make sure your loan repayments are made on time, and consider setting up automatic payments to avoid forgetfulness.
9. Not Planning How You’ll Repay the Loan
Getting a personal loan without a repayment plan is like driving without knowing the destination. You could end up missing payments, falling into deeper debt, and hurting your credit score.
Before applying, calculate how much you can afford to repay each month, and make sure you have a realistic plan to pay off the loan in full. This will help you stay financially stable and avoid damaging your borrowing history.
10. Taking a Personal Loan Before Applying for a Home Loan
If you’re planning to buy a home soon, be cautious about taking a personal loan beforehand. Banks assess your Total Debt Servicing Ratio (TDSR), which shows how much of your income is already going toward repaying debts. In Singapore, the TDSR limit is currently capped at 55%.
If your personal loan pushes you above that limit, it might reduce your chances of being approved for a home loan. If buying a house is on your radar, hold off on taking any new personal loans until after your mortgage is approved.
Conclusion
While personal loans can be helpful, they come with responsibilities. Making a hasty decision or overlooking key financial details can land you in trouble.
Take your time to understand your financial health, compare loan offers, and plan for repayment before signing any agreements.
By avoiding the mistakes listed above, you can make better borrowing decisions that support your long-term financial well-being.
Let your loan work for you—not against you.
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