4 Common Loan Mistakes First-Time Borrowers Make

Are you about to take your first loan? Read this before you sign that paper. Borrowing money for the first time can feel exciting. A personal loan to buy a bike, or a home loan to buy your dream house – it's a big step. But it can also become a lifelong headache if you make the wrong decision.

In fact, new-to-credit borrowing dropped 21% by December 2024 due to lenders tightening consumption-driven loans, showing increased caution toward inexperienced borrowers. Why? Because many people don’t understand the full picture when they take a loan. We’re not talking about minor slip-ups. These are mistakes that burn your wallet for years.

In this blog, we'll explore the biggest mistakes first-time borrowers make. You’ll also see Indian examples, tables, and math to show how these errors impact your money.

First, Know Your Loan Type and How Much You Actually Need

Let’s be real. Most people don’t know how much they truly need. They round off the amount or go with what the bank says they are eligible for. That’s the first mistake.

You might be eligible for ₹1,00,000. But do you need that much? What if ₹50,000 were enough?

Example:

• You borrow ₹1,00,000 at 14% interest for 2 years.
• Monthly EMI = ₹4,822
• Total you pay back = ₹1,15,728

Now, what if you took only ₹50,000?

• EMI = ₹2,411
• Total = ₹57,864

That’s nearly ₹57,864 saved!

Here is a quick comparison:

Never borrow more just because you can. Think needs, not wants.

Also, many first-timers confuse secured and unsecured loans. Secured loans like home loans have lower interest rates. Unsecured loans like personal loans have higher rates. Know what you are getting into.

Banks offer top-up loans too. But unless you need them, avoid.

Read More – What Every Borrower Should Know

Hidden Charges: The Silent Killers

Everyone checks the interest rate. But the actual cost? That's in the hidden fees.

Processing fee. Admin charge. Documentation fee. Insurance charges. Late penalty. All these stack up.

Here’s what can happen: You borrow ₹5,00,000 for 2 years at 11%. EMI = ₹23,400/month. Add ₹10,000 processing fee.

• Total EMI paid = ₹5,61,600
• Add fee = ₹5,71,600

Now, real interest? Not 11%. It’s closer to 12.5%.

Use APR (Annual Percentage Rate). It includes all charges.

Ask the lender about APR, not just interest. Some NBFCs hide these smartly in documents you skip reading.

Credit Cards: The Trap of Minimum Payment

Let’s say you get your first credit card with a ₹1,00,000 limit. You swipe the full amount. Now the bank says minimum due is just ₹5,000.

You feel good. You pay only ₹5,000. But next month, interest of 3.5% is added on the rest.

Here’s how it explodes:

• Month 1: Due ₹1,00,000 → pay ₹5,000
• Month 2: Interest added ~₹3,325 → new due = ₹98,325
• Month 3: Pay again ₹5,000 → more interest

Within months, your due becomes ₹1,20,000 or more.

Credit Card Minimum Trap:

You get stuck. Banks love this. You feel you are paying. But your principal remains untouched.

Always pay the full due. Minimum payment is a trap.

Floating Rate vs Fixed Rate Confusion

Many people find loan terms confusing, especially floating vs. fixed rates. Most people choose floating because it starts low.

But when the RBI hikes the repo rate, banks raise rates too. That means your EMI increases.

Also Read - The Importance of Financial Education in Responsible Borrowing

Example: You take a ₹10,00,000 loan at 10% (floating).

• EMI = ₹21,250/month
• If the rate increases to 12%, EMI = ₹22,244

Over 5 years, that’s ₹59,640 more paid.

Choose a fixed rate if you're not ready for such shocks. Also, ask your bank if they allow part-prepayment. Some don’t. Some charge extra.

Check lock-in periods too. These stop you from closing the loan early.

Final Thoughts

Loans are serious. First-timers often look only at how much EMI they can manage. But you must see the bigger picture. The rate. The fees. The terms. The traps.

Never borrow just because the offer sounds sweet. Calculate, ask, and double-check. And remember, a loan is not free money. It's a long-term cost on your peace of mind.

Make it work for you. Not against you.

FAQs

1. How much personal loan can I get on a salary of ₹30,000?

Most lenders offer loans up to 15x your net salary. So you can get around ₹4,50,000. But it depends on credit score and existing EMIs.

2. Will missing 1 EMI affect my credit score badly?

Yes, even a single missed EMI is reported to CIBIL. It can drop your score by 50-100 points instantly.

3. What is a good CIBIL score to get a loan easily in India?

750 and above is considered safe. Anything below 700 may get your application rejected or interest increased.

4. Are gold loans better than personal loans?

Gold loans have lower interest and quicker approval. However, your gold is at risk. Use them only when repayment is certain.

5. Can I take two personal loans simultaneously in India?

Yes, but only if you have repayment capacity and your credit report shows no defaults. Banks check your FOIR (fixed obligation to income ratio).

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?