Common Borrower Pitfalls and How to Avoid Them

Refinancing your high interest-debt or funding a major expense with a fixed rate personal loan can be a wise decision. However, once you have your loan and money in the bank, don’t fall off course. Stay on track and avoid these common pitfalls so you can make the most of your new loan and stay in good standing for future credit opportunities.

Common Borrower Pitfalls

Pitfall #1: Losing Sight of your Goals

What can happen

Meet Robin. She got a $10,000 loan to consolidate her high-interest debt and say goodbye to credit cards. The influx of cash in her bank account felt great, but it also distracted her from her goals. After walking past her favorite store, she spent $3,000 on designer shoes that she didn’t really need, leaving just $7,000 to go toward paying off her credit cards. A few months later, she was still making the minimum payment on multiple credit cards, with no end in sight.

How to avoid it

Don’t lose sight of your goals. You got this loan for a reason; don’t convince yourself it’s okay to use it for something else. If your goal was to pay off your credit cards or consolidate debt, get started right away! Check out different strategies for paying off debt quickly and pick the one that works for you. If you borrowed money for a big purchase or a project, do what it takes to stay within your budget and avoid overspending.

Pitfall #2: Ditching Your Budget

What can happen

Meet Tony. He felt incredible relief from unmanageable payments when he refinanced his credit card debt. However, that feeling of relief fooled him into taking a break from budgeting and tightening his belt. He was eating out instead of grocery shopping and taking expensive cab rides instead of using public transit. Overspending in multiple categories undid his good progress AND left him with hardly enough money to make the monthly payments on his new loan.

How to avoid it

Don’t forget about your budget. After you’ve put your new loan to work, take time to revisit your monthly budget and stick to it! Tally up your income and your expenses, and see where the money is going. Don’t forget to adjust your monthly expenses to account for your new loan (and any old debts you may have paid off). You may need to adjust your spending goals, but this will help you stay on track.

Pitfall #3: Giving in to Temptation

What can happen

Meet Matt. He put his new loan to work and made good progress on his financial goals, but temptation hit. After a few impulse purchases that were outside of his budget – buying tickets to the NBA finals and many nights out with friends – his credit card payments were ballooning. He felt stretched thin again and the monthly payments became challenging to make.

How to avoid it

Watch your spending. It might be tempting to overspend when you get a large deposit in your bank account but remember why you got this loan and that you have to pay it back. Don’t let temptation fool you into falling back into the debt cycle – stick to your budget, and adopt some good habits to keep your spending under control.

Pitfall #4: Not Setting Yourself up for Payment Success

What can happen

Meet Vida. She used a personal loan to install a new swimming pool. She kept this project within budget, but she didn’t think about how missed payments could impact her wallet and credit. Focused on finishing the pool before summer started, she forgot about her loan payments and missed her monthly bill a few times. Despite her best intentions, her credit score took a hit after a few slip-ups and those negative records stuck with her for years.

How to avoid it

Stick with your payment plan. Take advantage of automatic payments and set up account balance alerts so you’re sure you have enough money for your bills. Contact your lender and ask to adjust your payment date to a day of the month that works best for you.

Closing Thoughts

A new loan can open up doors to more manageable payments, debt-freedom, and more. But it’s important to stay on top of things — don’t lose sight of your goals and stay vigilant about your budget and your spending. You don’t want to let a few slip-ups unwind all the good progress you’ve made!