3 Personal Loan Mistakes You Don't Want to Make at a Time When Rates Are High

Aim to avoid these at all costs.

There's a reason consumers are frequently drawn to personal loans. A personal loan lets you borrow money for any purpose, whereas other loan types tend to restrict you to a specific purchase. A mortgage, for example, can only be used to finance the purchase of a home.

As of the end of 2022, U.S. consumers had a collective $222 billion in personal loan debt, according to data from TransUnion. But before you add to that number by applying for a personal loan, keep these big mistakes on your radar -- and do what you can to avoid them at all costs.

1. Borrowing more than you need

Interest rates are up these days on many different loan products. The reason? The Federal Reserve has been raising interest rates in an effort to cool inflation. And while the Fed doesn't set consumer interest rates directly (it oversees the federal funds rate, which banks charge each other for short-term borrowing), when it raises its benchmark interest rate, consumer borrowing costs tend to climb.

Since it's more expensive to take out a personal loan these days, it pays to keep the amount you borrow to a minimum. If you're trying to fix up your car and you've been given an estimate of $4,200, don't borrow $6,500. Instead, look at borrowing $4,500 or even $5,000 to give yourself a modest buffer without going overboard.

2. Borrowing when your credit is poor

If you're taking out a personal loan to cover an emergency expense, then you may not be able to put off your loan application. But if you're borrowing to do something like renovate your home, then it pays to hold off on a personal loan if your credit score could use work.

Personal loans are unsecured, so the lower your credit score, the higher an interest rate you're likely to end up with on a personal loan. And since loan rates are up in general right now, you don't want to add to that pain.

One way to potentially boost your credit score pretty quickly is to review your credit report for errors. Correcting a mistake could result in a nice lift to your credit score. You can also raise your credit score by paying all of your bills on time. But that's more of a process, and it might take longer to get results.

3. Not shopping around

While borrowing has generally gotten more expensive, ultimately, each lender sets its own rate when it comes to personal loans. And it's important to do some rate shopping before signing a loan agreement. If you go with the first lender who approves your application, you could end up getting stuck with a higher interest rate on your loan -- and higher monthly payments to go along with it.

You may have your reasons for taking out a personal loan at a time when rates are high. But keep these points in mind if this is a road you're considering going down.