Sometimes taking out a loan is unavoidable, such as for education or business development. Usually, these investments pay off if you carefully calculate your financial burden. However, improper use of credit can lead to serious problems.
In this article, we will examine the most common mistakes borrowers make and how to avoid them.
Contents
- Not Knowing Your Credit History
- Lack of Pre-Approval
- Focusing Only on the Interest Rate
- Taking a Loan for a Gift
- Carelessness with the Loan Agreement
- Brief Tips on Avoiding Loan Mistakes
1. Not Knowing Your Credit History
Your eligibility and terms for a loan depend heavily on your credit history — the better it is, the higher your chances of approval and better loan conditions. Therefore, it’s wise to check it periodically.
- The easiest way is through the government services portal, using the section that provides access to the list of organizations storing your credit history.
- You can also request your credit rating from credit bureaus, which provide free electronic reports twice a year and one paper report annually.
- Some banks offer this information as a paid service.
2. Lack of Pre-Approval
Often, people first find a property, pay a deposit, and only then apply for a mortgage, which may be denied or approved for a much lower amount than needed. To avoid this, check your borrowing limits and conditions with your preferred bank beforehand. Provide them with details about the property you like — sometimes the bank’s internal assessment is more accurate than other methods. If the property is unsuitable, the bank won’t approve the loan.
3. Focusing Only on the Interest Rate
Banks often attract borrowers with low interest rates on mortgages and other loans. However, hidden fees such as insurance and other charges can significantly increase the loan’s total cost. It’s better to consider the full repayment amount to understand how much you will actually pay the bank. You can also calculate the effective rate based on your monthly payment.
4. Taking a Loan for a Gift
It’s generally unwise to take a high-interest loan just to surprise someone with an expensive gift or a vacation, especially if you will be repaying it for many years. Time will pass quickly, but the financial burden will remain. It’s better to consider reasonable saving strategies instead.
5. Carelessness with the Loan Agreement
Many borrowers don’t thoroughly read the loan agreement and sign it in excitement, assuming no problems will arise. However, if you miss payments, your debt can snowball due to penalties and fines. All these conditions are clearly stated in the contract, so it’s important to understand what you agree to when borrowing money from a bank.
Brief Tips on Avoiding Loan Mistakes
To avoid unpleasant situations with loans, pay attention to the following:
- Calculate the maximum amount you can borrow by adding all your income and mandatory expenses. Divide the remaining sum at least in half: one part for loan repayment and the other as a safety cushion for unforeseen situations.
- Sometimes it’s better to accept a higher interest rate in exchange for a longer loan term.
- Compare offers from different banks.
- Don’t rush! Think carefully about whether you really need what you plan to finance with a loan. There may be other ways without overpaying.
