1.Taking loans to fund lifestyle purchases or non-essential items

Loans are meant to address financial needs but using them for non-essential items like luxury purchases or vacations can be harmful. While this might feel rewarding at the moment, it can significantly strain your future finances. 

Lifestyle-related borrowing can quickly pile up debt, increasing the risk of missed payments or loan defaults. Lenders may consider this a red flag, potentially affecting your chances of getting future loans​.

2.Making applications without checking eligibility

Applying for a loan without confirming your eligibility can be a costly mistake. Each rejected loan application typically results in a hard inquiry on your credit report, which lowers your credit score. Additionally, multiple rejections signal to lenders that you might be financially unstable, further reducing your chances of approval. 

It is essential to understand the lender’s criteria, like income requirements, credit score minimums or employment status before you apply.​

3.Not considering the terms and conditions of the loan

It’s easy to overlook the small details in a loan agreement but failing to review the terms and conditions can have long-term consequences. Hidden fees, varying interest rates or prepayment penalties can catch you off-guard, making repayment more difficult than expected. 

Fully understanding the fine print ensures that you aren’t blindsided by unfavourable terms, like a sudden interest rate increase or penalties for early repayment.​

4.Choosing long-term loans thinking it will reduce your budget

While opting for a long-term loan may lower your monthly payments, it also means you’ll pay more in interest over the life of the loan. Borrowers often mistake this lower monthly burden as a budget-friendly choice without considering the higher total repayment amount. 

Carefully assess how long-term loans affect your financial situation in the long run and choose a plan that aligns with both short-term affordability and long-term financial health​.

5.Making multiple loan applications

Submitting numerous loan applications in a short span can hurt your credit score, as each application results in a hard inquiry. This not only lowers your credit score but also suggests financial desperation, making you appear as a high-risk borrower to lenders. 

It’s crucial to research different loan options beforehand and apply for the one that best suits your needs, minimising unnecessary inquiries on your credit report​.

6.Not verifying if the loan fits your budget

Taking a loan without fully understanding how it impacts your budget can lead to financial stress. If the monthly payments stretch your budget too thin, you may struggle to keep up with other essential expenses. 

Failing to account for this can result in loan defaults, which significantly affect your credit score. It’s important to ensure the loan repayment comfortably fits within your financial means, considering both your current and future obligations.​