10 Common Personal Loan Mistakes to Avoid

Taking out a personal loan is a significant financial decision that can either improve your situation or create ongoing stress, depending on how you approach it. Many Australians make avoidable mistakes when borrowing that cost them money and peace of mind. By understanding these common pitfalls, you can navigate the personal loan landscape more effectively and make decisions that serve your long-term financial health.

Mistake 1: Not Shopping Around

One of the most costly mistakes is accepting the first loan offer you receive, particularly from your existing bank. While banking with an institution for years might seem like a reason to expect good treatment, loyalty doesn't always translate to the best rates.

Interest rates and fees vary significantly between lenders. The difference between the highest and lowest rates on the market can be 5% or more. On a $20,000 loan over five years, that difference could cost you thousands of dollars in additional interest.

Always compare offers from multiple lenders, including banks, credit unions, and online lenders. Use comparison websites, but also check lenders directly, as some don't appear on comparison platforms.

Mistake 2: Focusing Only on Monthly Payments

It's natural to focus on whether you can afford the monthly payment, but this narrow focus can lead to expensive decisions. A lower monthly payment might come from a longer loan term, which dramatically increases total interest paid.

Consider a $15,000 loan at 10% interest. Monthly payments over 3 years are approximately $484, with total interest of $2,420. Extend that to 7 years, and monthly payments drop to $249—but total interest rises to $5,900. That's an extra $3,480 for the "convenience" of lower monthly payments.

Always look at the total cost of the loan, not just the monthly amount. Use our personal loan calculator to see how different terms affect both monthly payments and total interest.

Mistake 3: Ignoring the Comparison Rate

The headline interest rate can be misleading because it doesn't include fees. A loan advertised at 7% might have significant establishment and monthly fees that push the effective cost much higher.

Australian regulations require lenders to display a comparison rate that incorporates most fees. While not perfect, the comparison rate gives a more accurate picture of the true cost of borrowing. Always compare loans using their comparison rates, not just the advertised interest rates.

Mistake 4: Borrowing More Than Necessary

When approved for a loan, some borrowers take the maximum offered rather than what they actually need. This "just in case" money sits in your account while you pay interest on it—or worse, gets spent on things you didn't really need.

Calculate exactly what you need before applying, and stick to that amount. If you need $12,000 for home renovations, borrow $12,000—not $15,000. Every extra dollar you borrow is a dollar you pay interest on.

Mistake 5: Not Reading the Fine Print

Loan contracts contain important details about fees, penalties, and restrictions that can significantly affect your experience. Early repayment fees, restrictions on extra payments, and late payment charges are commonly overlooked until they become costly problems.

Read your loan contract carefully before signing. If something is unclear, ask the lender to explain it. Key things to check include early repayment fees, whether extra payments are allowed, what happens if you miss a payment, and any circumstances under which your rate might change.

Mistake 6: Making Multiple Applications Simultaneously

Each loan application triggers a hard enquiry on your credit file. Multiple enquiries in a short period can damage your credit score and signal to lenders that you're desperately seeking credit—often leading to rejections or worse terms.

Research and compare loans before applying. Use pre-qualification tools that don't affect your credit. When ready, apply to your preferred lender first, only moving to alternatives if declined.

Mistake 7: Choosing the Wrong Loan Type

Secured loans, unsecured loans, fixed rates, variable rates—the options can be confusing. Choosing the wrong type for your situation can cost money or create unnecessary risk.

If you're buying a car, a secured car loan usually offers better rates. If you might pay the loan off early, a variable rate without early repayment fees is probably best. If you value payment certainty, a fixed rate provides stability. Match the loan type to your needs and plans.

Mistake 8: Not Considering Your Future Situation

Your financial situation might change over the loan term. Job changes, family additions, or other life events can affect your ability to make payments. Borrowing the maximum you can afford today leaves no buffer for tomorrow's uncertainties.

Consider potential changes when deciding how much to borrow and what payment to commit to. A comfortable margin protects you from stress and missed payments if circumstances change.

Mistake 9: Using Loans to Fund Lifestyle

Borrowing for assets or investments that provide ongoing value can make sense. Borrowing to fund holidays, weddings, or lifestyle upgrades often doesn't. You'll still be paying for that trip or party long after the memories fade.

Think carefully about what you're borrowing for. Is it something that will still feel worthwhile when you're making payments years from now? Could you save for it instead of borrowing?

Mistake 10: Not Having a Repayment Plan

Some borrowers take out loans without a clear plan for how they'll make repayments. They know they can technically afford the monthly payment, but haven't thought through how it fits into their overall budget.

Before borrowing, create a detailed budget that includes the loan payment. Identify exactly where the repayment money will come from each month. Consider setting up automatic payments to ensure you never miss a due date.

Bonus Tip: Use Tools to Make Better Decisions

Many of these mistakes stem from not fully understanding the numbers involved in borrowing. Before taking out any personal loan, use our free personal loan calculator to model different scenarios. See how interest rates, loan terms, and fees affect your total costs. Armed with this information, you're far less likely to make costly mistakes.