Every mistake that you make before and after getting a Personal Loan directly affects your credit score. It not only leads to the rejection of your current loan application but also affects future applications. While you make many of these mistakes unknowingly, their impact can be severe. In this blog, we will explore the 15 most common Personal Loan errors you must avoid in 2025.
Why Should You Avoid Personal Loan Errors?
Personal Loans offer quick access to funds when you need them most. However, they directly affect your credit score and borrowing history. Here's why you should avoid them:
- Multiple loan enquiries lower your CIBIL score by a few points.
- Even a single delayed EMI reduces your score and stays on your credit report for up to 7 years.
- This hampers your ability to get loans in the future. Even if approved, the interest rate will likely be higher, and the terms will be less favourable.
15 Personal Loan Mistakes You Must Avoid
Certain common mistakes can seriously impact your credit score. Here are some fundamental mistakes to avoid:
1. Missing EMI or Delayed EMI Payment
Missing or delaying a monthly EMI payment on your Personal Loan drastically reduces your CIBIL score. For example, if you miss one EMI payment, your CIBIL score can drop by 50 to 70 points, and this late payment will remain visible on your credit report for up to 7 years. It takes months and consistent payments to increase the credit score, but even a single delay can have a severe impact on your credit profile.
Also Read: How to Get a Personal Loan for a CIBIL Score of 550
2. Applying for Multiple Loans in a Short Time
When you apply for multiple personal loans within a short period, lenders may interpret this behaviour as a sign of financial distress and determine that you represent a higher credit risk. Each personal loan application triggers a hard inquiry, which allows the lender to assess your credit report formally. Accumulating several hard inquiries in a brief span can lower your credit score, which in turn directly reduces your likelihood of personal loan approval or leads to less favourable terms.
3. Maintaining a Healthy Debt-to-Income (DTI) Ratio
Most lenders in India consider a DTI below 40% favourable, as it indicates you can manage your financial obligations without excessive strain. For example, if your monthly income is ₹50,000, keeping your total monthly debt payments below ₹20,000 ensures your DTI remains within the recommended range.
Conversely, a DTI above 40% increases the likelihood of loan rejection and restricts access to new credit. Therefore, it is important to borrow only what you need and maintain a DTI ratio below 40%.
Also Read: How to Get a 900 Credit Score – Tips to Improve CIBIL
4. Not Checking Your Credit Report
Over 50% of Indians don't check their credit scores. This affects borrowers in different ways. You are not aware of your credit score, which makes it difficult to confirm whether you meet the lender's eligibility criteria. Different banks and Non-Banking Financial Companies (NBFCs), in that, follow their own criteria. This gap can lead to loan rejection.
You are also at risk of being unaware of any inconsistencies or incorrect entries in your credit report. For example, if your previous lender fails to report a closed Personal Loan to the credit bureaus, it can reduce your credit score. To address this, you should regularly review your credit report and promptly dispute any inaccuracies with the credit bureau to prevent adverse effects on your credit profile.
5. Failure to Compare Interest Rates between Lenders
The interest rates offered by banks, NBFCs, and fintech lenders can vary substantially. For instance, the interest rates for personal loans in India commonly range from 9.99% to 25% per annum, depending on the lender and the applicant’s profile.
This is why you must compare lenders, their interest rates, tenures, and terms. For example, on a loan of ₹5 lakh over five years, a difference of just 1% in the interest rate can increase the total interest paid by approximately ₹2,700 per year, resulting in an additional cost of about ₹13,500 over the loan tenure. Such variations highlight the importance of careful comparison to avoid unnecessary financial burden.
6. Disregarding the Total Cost of the Loan
EMIs can appear affordable, yet they do not reflect the full cost. Personal Loans are associated with processing fees, GST, prepayment fees, and interest. You can easily forget about the overall cost and believe you are getting a good deal, only to pay much more than you anticipated. Factoring all the charges before applying helps you avoid unpleasant surprises.
Some lenders, like Poonawalla Fincorp, highlight all charges upfront, including processing fees and prepayment terms, so borrowers can make informed decisions. Opting for such transparent lenders helps you avoid hidden costs and financial strain.
7. Borrowing More Than You Need
Personal loans are readily available, and the lenders usually offer higher loan amounts. However, taking more loans than your financial needs simply because they are there will add to your EMI and overall interest paid. This may strain your future finances and reduce your ability to handle emergencies or other costs. Avoiding borrowing more than what you need leads to lower total interest paid and fewer monthly dues.
8. Selecting a Longer Tenure to Reduce EMIs
Lower EMIs are attractive, but a long tenure implies that you will pay interest over a longer period. This adds a lot of interest to your overall interest outlay. The shorter the tenure, the greater the EMIs and the lesser the total cost. Always strike a balance between EMI cost and long-term cost.
9. Frequently Taking Short-Term Loans
Taking short-term loans frequently gives the impression you’re cash-strapped. Jumping from one loan tenure to another raises red flags. Instead of building trust, you appear to be in a debt trap, which kills your creditworthiness.
10. Overlooking Hidden Charges
Most borrowers are preoccupied with interest rates and ignore fees. Less-visible or hidden fees can significantly raise the cost of the loan. This is why you must always check processing fees, late payment fees, prepayment fees, insurance fees, and statement fees.
11. Providing Wrong or Inadequate Information
Mistakes or omissions in information, including incorrect income, address, or documents, can delay the approval process or result in rejection. To determine your eligibility, lenders require valid and confirmed information. Minor errors can affect your opportunities. If your name, PAN, or other identifiers are incorrect on your credit report, it will make you vulnerable.
12. Taking Loans Without Reading the Terms and Conditions
Many borrowers get a Personal Loan without reading the terms and conditions. This keeps them unaware of hidden charges, pre-payment fees, and variable interest rates. These lead to higher interest costs, unexpected monthly burdens, and additional charges involved.
13. Frequent Balance Transfers
Transferring a loan from one loan to another suggests you lack long-term planning. Each balance transfer may trigger a hard enquiry or raise concerns over your financial health. The constant shifting adds to complexity and makes your credit profile look unstable.
14. Falling for Fake Loan Offers
Scam loan apps and fraud messages are more advanced in 2025. False lenders attract borrowers with quick approvals and low-interest rates. Using unverified sources may result in identity theft, financial loss, or the abuse of your documents. Always use official bank or NBFC platforms to avoid falling victim to these financial pitfalls.
15. Ignoring Prepayment Terms
Most borrowers believe that they can close the loan at any time. Nevertheless, some lenders impose prepayment or foreclosure fees. Unless you read these terms first, you may pay more than you expected to pay in order to cut down on your interest payment.
Also Read: How to Improve Your Credit Score with an Online Personal Loan?
To Conclude
Lenders often see a strong credit score as a sign of financial discipline and credibility. Whether it is before or after taking a personal loan, a single mistake can significantly reduce your credit score. This is why you must avoid the common Personal Loan mistakes that could hamper your credit score.
Choosing the right lender is just as important as avoiding mistakes. For instance, Poonawalla Fincorp offers personal loans with a transparent pricing structure and clear disclosure of charges. This ensures borrowers don’t face hidden surprises and can comfortably manage EMIs. With loan amounts of up to ₹50 lakh available, applicants can access funds while maintaining financial discipline
FAQs
Will all banks reject a Personal Loan due to a low CIBIL score?
A low CIBIL score may prevent you from getting loans at favourable terms. However, specialised NBFCs or lenders may still offer you a loan, but with higher interest rates and stricter conditions to compensate for the increased risk.
What will be the impact of not checking my credit score on loan approval?
In case of a low score, your application can be rejected or delayed. You can also get a lesser amount of loan than anticipated.
Will lenders turn me down despite my high income?
Yes. Money is not sufficient; the lenders consider your credit rating, the history of payment, and outstanding debts before they give you a loan.
What is a good credit score for Personal Loans in India?
A score of 750 and above usually provides you with increased approval and reduced interest rates.
What can I do to improve my credit score prior to a loan application?
Pay EMIs on time, use fewer credit cards, settle outstanding debts, do not apply for more than one loan, and have a good history of repayment.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply