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10 Mistakes that Most People Make When Applying for a Loan
There are a lot of factors that lenders consider before deciding that you can qualify for a loan.
Some may overlook some of the most obvious, but sometimes it’s the smallest factors that will prevent you from getting approved. Applying for a personal loan shouldn’t be a stressful experience.
It should be simple, easy and helpful. This article will be discussing ten common mistakes that most people make and how they can help improve your chances of getting approved when applying for a loan.
10 Common Mistakes When Applying for a Loan
Taking out a longer loan term than necessary
When applying for a loan, you have the option to either take a short-term or a long-term loan. In a longer-term loan, you’ll get lower monthly payments.
However, this means that you will have to pay more interest, which means that the loan will be more expensive overall. Additionally, longer loan terms tend to have higher interest rates than shorter ones.
So, it’s best to choose a loan with a shorter repayment term to avoid paying a huge amount in interest alone. It’s also worth considering whether you can afford to pay back the loan before the agreed period, so you can avoid paying any extra fees.
Not considering your credit score
Lenders will want to know whether you can afford to repay the loan amount, which is why they require borrowers to provide income and employment information as well as bank details. But one of the most important things lenders will need to see before they grant you a loan is the copies of your credit score.
They will check your creditworthiness or your likelihood of paying back the loan on time.
If you have a good credit score (a good credit score from Equifax is 622), then you will most likely get competitive interest rates. But if your score is low, you may get very high-interest rates which will likely cause you to spend a lot more on interest. In some cases, the lender might also deny your application.
So before applying for a loan, you should check your credit score. If your credit rating is on the lower end, try to explore other options to get the cash you need.
Not keeping your finances up to date
Before you apply for a loan, you have to make sure your finances are up to date, including having accurate records of income.
Your financial documentation is the most important thing lenders look at when people apply for loans.
If your finances are not up to date then it would mean you’re not that careful when it comes to spending money. This might affect your application and lenders will most likely deny your loan application.
Not shopping for other offers
If you need cash, it might be tempting and easier to go for the lender that will first approve your loan. However, this is one of the most common mistakes people make when applying for a loan. They tend to settle for the first and more convenient option.
If you go around and survey the loan market, and meet different lenders, you will see that there are better options with much more interest rates for your loan. Failure to shop around can leave you paying for high-interest rates which can cost you more money.
Making major changes before even getting a loan
Another common mistake that people make when applying for a loan is that they already make major changes to their financial situation midway such as making a big purchase or switching jobs. Doing this before you are fully approved for a loan can result in your lender rejecting your application so be careful.
Applying for more than one loan at a time
Applying for more than one loan at a time may seem like a good idea to raise your chances of getting one. However, this is a quick way to not get any.
The best way is to apply for a loan and to stick with it until approval. It’s because loan applications require hard inquiries which may temporarily affect your credit score.
If your credit score drops, you won’t be able to get the same loan rates anymore, and you may end up paying.
Additionally, such borrowers are viewed as risky by lenders, which either makes lenders reject your application or approve it with a much higher interest rate.
Overlooking fees and penalties
Some types of loans come with fees that could be costly for borrowers if overlooked. This include:
- Application fees or the amount the lender charges borrowers to apply for a loan
- Late payment fees or the amounts you pay after the due date
- Origination fees or the processing fees assessed by the lender to set up the loan
Most fees are avoidable if you make timely payments. Some lenders don’t charge application or origination fees so it’s best to look for one.
Not reading the fine print
Before a loan application is finalised, lenders will either send closing documents electronically or hand them to you for review. You must read them carefully before agreeing to the terms and conditions and signing the documents before the loan proceeds are disbursed to you.
There may be several pages for you to review and sign to close the loan but it depends on the lender.
The fine print may include information regarding the calculation of interest, payment methods, and schedule of fees.
It will also say if the lender charges more for certain payment types or if they will automatically withdraw payment from your bank account.
If you sign without reading the fine print, you could be in for a surprise if the lender withdraws your loan payment and overdraws your account. This will result in you paying extra fees to your bank and lender.
Opening and closing credit cards
In addition to not making big purchases, switching jobs, or moving your money around mid-application, you shouldn’t open or close credit cards. This is because loans are calculated and offered based on your credit utilisation ratio as well as your credit score, which can both be affected by messing with your credit cards. You should wait until your loan application is approved.
Assuming you’ll get a loan
Some borrowers may get prequalified for a loan but that doesn’t mean that they are approved already, so they make the mistake of making a big purchase.
Prequalification means a lender has already looked at your basic information but you don’t have a loan at this point yet.
You can still end up getting rejected for a loan and a big purchase may affect your credit score and ruin your chances of getting approved.
Lenders will still perform a hard inquiry for a more in-depth analysis before they approve you.
How to Avoid Loan Application Mistakes
There are various factors that you must keep in mind to ensure that you can get a loan smoothly. Here’s a list of ways you can do to avoid loan mistakes.
- Look for different lenders that offer loans and choose the one that offers the best rates.
- Compare and choose the loan product best suited for your needs.
- Check your eligibility for the loan and don’t apply for one that you might not be eligible for. Too many rejections may affect your credit history.
- Try and find out as much information as you can about the loan you’re applying for such as the interest rates and other fees.
- Submit all the required documents to your lender and cooperate with the verification process.
- Makes sure that the information you provide is accurate and matches the corresponding documents.
- Never agree to become a loan guarantor to someone as this may affect your loan application if the time comes that you need it.
- Make sure that you have a good credit score so make sure that you pay your bills on time.
- Check your credit report at least 6 months before applying for a loan. If there are some disputes, get them corrected.
- Make sure that your score is at least 622 for a better chance of getting your loan approved.
Always take your time when researching loans and determine whether they are right for you. If you have a good credit rating, you should be able to choose a lender who offers reasonable interest rates. Be wary of excessive fees or other charges that might be buried in the fine print.
Ignore any marketing messages that inflate your sense of what you can afford. If a lender pitches a loan with payments that seem attractive but don’t offer less expensive options, move on until you’re confident you’ve found a company that will offer you honest answers.
Marjorie Hajim is the SEO Manager for Friendly Finance. Friendly Finance is a leading loan matching service in Australia specialising in consumer finance. She loves growing businesses with a focus on their online presence and passionate about organic growth and all things digital.