3 Mistakes You Might Make When Applying for Your First Personal Loan

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Don’t fall into these traps. 

It’s fair to say that personal loans have become a pretty popular way for U.S. consumers to borrow money. On a national level, personal loan balances reached $222 billion as of 2022’s fourth quarter, according to recent data from TransUnion.

If you have a need to borrow money, you may be inclined to take out a personal loan. But if it’s your first time exploring this option, then it’s imperative that you do your best to avoid these big mistakes.

1. Not figuring out if your monthly payments fit into your budget

Maybe you want to borrow $10,000 to renovate your basement. Or maybe you need cash to tackle a few smaller needs in short order, like fixing your car and replacing some furniture. You might have a good sense of how much you need or want to borrow. But are you certain you can afford the monthly payments that come with borrowing that sum?

Falling behind on a personal loan could have negative financial consequences. It could wreck your credit score and make it difficult to get approved for a loan for many years. So before you take one out, crunch the numbers to make sure those payments really work for your finances.

2. Not shopping around

If your credit score is great, you may find that the first lender you talk to approves your personal loan application. But before you enter into that agreement, take the time to shop around with different lenders to see what rates they have to offer. You may find that the third or fourth lender you talk to has a better deal to give you than the first.

3. Not comparing rates with a home equity loan

If you rent your home rather than own it, then you may find that a personal loan is your most economical borrowing option from an interest rate perspective. But if you own a home, it pays to compare the rate you can get on a personal loan to what you qualify for with a home equity loan.

Home equity loan lenders take on less risk than lenders that give out personal loans. The reason? Personal loans are unsecured, so if you fall behind on your payments, there’s no specific asset your lender can go after to get repaid. With a home equity loan, that loan is secured by your property itself. If you fall behind on your payments, in an extreme situation, your lender could force the sale of your home and get repaid that way.

Because home equity loans can be less risky than personal loans, you may find that the former leads to a lower interest rate on the sum you borrow. The result? Savings for you.

Personal loans can be very convenient. They allow you to borrow money for any purpose and they often close quickly. But before you take one out, make sure to crunch the numbers on your monthly payments, shop around, and see if a home equity loan is a better choice for you.

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