5 Common Mistakes People Make When Taking Out Loans

When you take out a loan, it can feel like you can do anything with your expanded budget. Whether you acquire personal loans from banks or choose cash loan Philippines’s fintech companies offer, having a bigger spending capacity can be empowering but sometimes can turn into one of the burdening financial mistakes when not properly managed.

5 Common Mistakes People Make When Taking Out Loans

Keep in mind that the money isn’t actually yours—it’s a loan and therefore you need to pay it back within the agreed-upon period. In short, you need to be wise and careful about spending the proceeds or you’ll end up with a huge hole in your wallet.

To make sure that your loan doesn’t negatively affect your financial health, here are some common mistakes you should avoid when taking out loans:

Taking Out a Loan “Just Because”

Before you apply for any type of loan, you need to be sure of its purpose. Do you need it to grow your business? Do you need to renovate your home? Do you want to make your travel dreams a reality? It doesn’t matter if the reason is practical or more leisure-inclined, as long as you’re 100% sure of the purpose of the loan so that you can focus your spending.

If you don’t have a specific goal in mind and you’re just taking out a loan because you’re qualified for one, stop. Being aimless with money isn’t a good habit, and it can be doubly detrimental with a loan. You may also feel like you need a loan right now to accomplish something ASAP. In this situation, you should evaluate. Is your goal something urgent? If not, you may be better off setting money aside than taking out a loan.

Taking Out a Loan That’s Too Big

Most lenders will specify a range of the amount you can borrow, based on various factors such as your income, credit status, and the like. For example, after submitting your documents, a lender may say that you can borrow ₱5,000 to ₱7,000. It can be tempting to go for the highest amount but it might not be the wisest decision.

Go back to the previous point: what is the purpose of your loan? If it can be achieved by borrowing ₱6,000, borrow that amount only. This will make it easier for you to handle the payments. Borrowing a large amount might mean you have more to spend today, but it can hurt your budget tomorrow. You may also end up not being able to pay off the loan at all, which can affect your credit rating. Worse, it can damage your reputation among lenders and you may have difficulty in applying for future loans.

Taking Out a Loan Without Shopping Around First

There are plenty of lenders you can borrow from and the “right” choice largely depends on your needs. If you’re looking for a small business loan, your best bet is to go with a bank. If you’re looking for a housing loan, you have the option to file with the government through the HDMF (Pag-IBIG). For quick cash loans of smaller amounts, there are plenty of independent lenders like fintech companies you can choose from.

Whatever you need the loan for and no matter how big or small an amount you may need, it’s best to do your research first before submitting applications. Don’t simply go with the first option you see. Rather, shop around and study various offers. Compare interest rates, payment options, and fees, among other crucial factors. By comparing every aspect of different loan products, you’ll be able to find the one that will best suit your needs and your financial capacity.

Taking Out a Loan Without Understanding the T&C’s

Before you sign your name on the proverbial dotted line on a loan document, make sure to study its contents thoroughly. Do note that some loans may have more information for you to digest (e.g., a business loan or a housing loan), so try to be more patient. Still, even if you’re only borrowing a small amount from a digital lender, it will serve you well to understand the terms and conditions. This way, you know exactly what’s going on and you won’t get confused or shocked by any detail.

If you have any difficulties in understanding the terms and conditions, feel free to inquire with the loan agent or officer. Make sure everything’s clear to you before you sign.

Taking Out a Loan from Multiple Lenders

It’s not bad to take out multiple loans from multiple lenders, per se. However, doing so can make it more difficult for you to keep up with your payments. You may also fail to immediately realize that a huge chunk of your income is going exclusively to your monthly installments; this can have a negative impact on your daily expenses.

ALSO READ: What are Bridging Loans?

In short, try to limit the number of loans you avail of at a time. This gives you more wiggle room in making budget adjustments and handling your financial obligations.

Managing your finances is challenging enough as it is. Don’t add to the stress and hassle by making mistakes when taking out loans. Keep this list in mind to avoid costly blunders.