Taking a personal loan? 5 costly mistakes to avoid before signing the agreement

A personal loan may appear to be a one-stop solution when you need money for an emergency because it requires less documentation and allows for faster loan disbursal, but the convenience may come at a cost if you don't avoid some traps.

Personal loans can provide convenient access to funds, but borrowers should be cautious about common pitfalls such as ignoring processing fees, prepayment charges or your repayment capacity that can later increase your cost of borrowing.

So, if you want to apply for a personal loan, you should look beyond the interest rate and ask your lender a more important question: how much will this loan actually cost me?

5 traps to avoid while applying for a personal loan

Part-prepayment or foreclosure? Avoid these mistakes

One of the biggest mistakes borrowers make is assuming that part-prepayment or foreclosure is automatically the most financially beneficial option.

Before making such a decision, borrowers should understand the applicable terms and charges and assess how the payment will affect their outstanding principal and repayment schedule.

In the case of a part-prepayment, they should also understand whether it will reduce the tenure or the periodic repayment and what that means for their overall financial commitments.

At the same time, borrowers should avoid using their entire emergency reserve simply to close a loan earlier. Maintaining adequate liquidity is equally important.

The right decision is one that balances the benefit of early repayment with the borrower's broader cash-flow position, liquidity needs and existing financial commitments.

RBI hikes repo rate: How will it impact new and existing personal loan borrowers?

The Reserve Bank of India (RBI) raised the repo rate by 25 basis points from 5.25% to 5.50% on October 7, 2026.

"With the increase in the repo rate, lenders are likely to increase interest rates for all new personal loans. Personal loans by most Banks and NBFCs are offered at a fixed rate; hence, most existing personal loan borrowers will remain unaffected," said Santosh Agarwal, CEO, Paisabazaar.

Only those with floating-rate loans may see their EMIs increase or their loan tenure being extended. Those who can afford it should choose a higher EMI, as with tenure extension, your total cost of the loan through higher interest outgo increases despite the same EMI.

A repo rate hike can influence the broader cost of personal loans if it is linked to Floating / External Benchmark-Linked Loans (EBLR/RLLR), but its impact on an individual personal loan will depend on the lender's pricing framework, the benchmark applicable to the facility and the terms of the loan.

For new borrowers, changes in the cost of funds and the broader lending environment may influence the terms offered by lenders.

For existing borrowers, the impact will depend on the structure of their loan and whether its pricing is linked to a benchmark that can be revised.

Borrowers should therefore look beyond the headline repo-rate movement and understand the specific terms of their loan.

Those considering fresh credit should assess the overall repayment obligation against their income and monthly cash flows, while existing borrowers should review their repayment schedule and maintain adequate liquidity.

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