Taking out a personal loan can be simple, when you go about it the right way. However, many people jump into the application process before they’re prepared.
Luckily, you can improve your odds of approval if you review the following list of common loan application mistakes made when applying for a loan. Either avoid the situation or take care of what you can before you start the loan application process. It could mean the difference between loan approval or loan denial.
1. Don’t Check Application Criteria
One of the most common mistakes to avoid when applying for a loan is to randomly pick any personal loan. Loans are designed to suit specific needs and they’re meant for specific borrowers.
Taking out a loan often means meeting specific requirements that ensure you meet regulatory laws and lender preferences. For instance, a lender may require personal identifying information such as your name, address, email, phone number, and Social Security Number or Individual Taxpayer Identification Number.
They may also ask for proof of a steady source of recurring income from certain sources as well as evidence of an active account with an American bank or credit union.
In some cases, lenders accept alternative income sources such as self-employment, disability, and pensions, while others only accept steady, full-time employment.
Some lenders require document uploads, while others use authorized digital income verification through your bank. Many lenders have minimum credit score requirements too, while others decide based on your income.
Before you spend time filling out an application form, quickly check the application criteria. Good lenders list their basic requirements so potential borrowers know whether or not they should apply.
2. Ignore Your Credit Reports
When taking out loans, credit often plays a vital role. Yes, you may be able to borrow even if your credit is less than perfect, but you won’t get the best terms. That’s why it makes sense to do what you can to improve your credit before you apply for a loan. One of the easiest ways to do this is by reviewing your free annual credit reports.
Mistakes appear on nearly half of credit reports and the credit reporting agencies calculate your credit scores based on this information. Of these, approximately 27% have the potential to damage your credit. The Consumer Financial Protection Bureau suggests you look for these errors.
3. Don’t Know Your Credit Scores
When you’re taking out a loan the lender wants to know you can afford to repay it. That’s why they ask for income and employment information.
However, your creditworthiness, which is an estimate of you paying back your loan on time often rests on your credit scores. Generally, the most competitive interest rates go to those with the best credit scores.
Don’t underestimate the impact your credit scores can make. Get your credit scores from all three credit bureaus to see where you stand. If your scores aren’t the best, you may still be able to borrow through certain lenders. You can also do many things to improve your credit score. Optimize your chances of approval before you start the application process.
4. Apply for Too Much Money
Taking out a personal loan can make sense when you borrow wisely. However, many people think it is a good idea to borrow extra money just in case they need it. This is a bad idea for several reasons.
First, when taking out loans you pay interest on what you borrow. While this may not seem like it is a big deal, it does add to your indebtedness. Let’s take a look at an example.
You decide to borrow $15,000 instead of $10,000, because you got a decent interest rate of 12.99% over 3 years. You really only need $10,000, but it would be nice to have an extra $5,000 for emergencies.
Unfortunately, you spend the entire $15,000 straightaway and nothing goes into an emergency fund. Now you must pay interest and make payments on the higher amount.
Interest charged over three years on $15,000 is $3,192.14 with payments at $505.34 per month. If you had only borrowed $1,000 at the same interest rate over 3 years you would pay $2,128.08 in interest with payments at only $336.89 per month.
Total difference – $1,064.06 more in interest and higher payments by $168.45.
Second, you are more likely to be approved if you apply for a lower amount. Lenders want to see wiggle room in your budget since it lowers the risk of default.
5. Choose Too Long a Loan Term
One of the most common personal loan mistakes is to choose a longer term on your loan just so you can afford your monthly payments. You don’t want to stretch the term out forever. Remember, you pay interest on what you borrow. The longer the term, the more you pay. Here’s an example.
Let’s say you borrow $10,000 over 36 months (3 years) at 11%. Your monthly payment would be $327.39 and total interest paid $1,785.94.
Compare that to borrowing $10,000 over 60 months (5 years) at 11%. Your monthly payment drops to $217.42, but total interest paid soars to $3,045.45.
That’s a whopping $1,259.51 more in interest.
If you’re unsure of how much you can safely afford, definitely create a budget. There are plenty of budgeting apps available that can help you calculate the precise amount you can spend on your payments. Work backwards and only borrow up to what you can afford, based on your budget.
6. Don’t Pay Attention to Fees & Penalties
When you’re taking out a loan you might be tempted to grab the first one a lender offers you. However, the cost of your loan can climb dramatically due to fees and penalties.
Examples of these that some lenders charge are:
Application fee – a flat fee charged to prospective buyers for the application process
Late fee – the amount you pay if you don’t make your payment by the due date.
Origination fee – an administration fee based on a percentage of your loan amount. Typically amounts range between 1 and 8 percent.
Prepayment penalty – fee levied if you pay more than your scheduled loan payments or you pay your loan off early.
NSF fee – penalty charged if you do not have funds in your account when the lender tries to withdraw your payment.
Fortunately, you can avoid all these fees and penalties if you manage your loan well and choose the right lender. Many do not charge application, origination, or prepayment fees.
7. Don’t Review Loan Application
Personal loan mistakes include not checking the accuracy of your application information.
Another common mistake on loan applications is not filling out every required line item. You might think you can skip it, but applications are often reviewed by artificial intelligence.
If it doesn’t detect needed information or your application information doesn’t jive, it will send you a refusal straightaway. Take your time when you apply and double check your work to avoid this frustrating situation.
There are also many other reasons for having a loan denied. Some we covered here, but others you may not have considered. Take care of what you can before you submit any loan application.
8. Apply for Multiple Personal Loans Through Various Lenders
It makes sense to look for the best possible loan and lender. However, you need to go about it in the right way.
Applying for multiple loans in a short period may negatively impact the credit score and lead to loan denials or higher interest rates.
So, how many is too many? If you want to go to various lenders, limit it to just a few. This limits unnecessary credit inquiries.
However, you have a better option if you want to maximize your chances of finding multiple loans. More on that later in this article.
9. Dismiss Debt Consolidation Loan
If you’re already carrying debt and you want to borrow more money, a debt consolidation loan may be a good option.
A debt consolidation loan is a personal loan that you can use for almost any purpose. You can pay off high interest credit card debt and borrow the extra money you need too. The advantage of this option is that it can simplify your finances and reduce interest paid if you find the right loan.
However, this is only a good option if you can get better terms and you dependably repay your debts. Taking out a loan to bail you out of bad spending habits isn’t going to resolve the issue.
10. Don’t Shop Around for Best Interest Rate
As mentioned, it is often tempting to grab the first loan a lender offers. Yet, even a small difference between what lenders offer can save you a lot. That’s why we suggest a better option for shopping around for the best possible loan – a loan broker.
A broker connects potential borrowers to a multitude of lenders. The broker reviews your application and then aligns your needs with good lending matches.
The best part is that the entire process happens quickly online and it costs you nothing to use the service. You immediately see what each lender’s offering you so that you can compare interest rates.
Once again, even small differences mean a lot. Here’s an example.
Let’s say you borrow $15,000 over 36 months at 12%. That works out to a monthly payment of $498 and total interest paid of $2,935.73.
Now let’s look at the costs at 8%. Your monthly payment drops to $470 with total interest paid at $1,921.64.
That’s $1,014.09 less in interest and $28 per month lower payments.
Furthermore, a broker network relies on a preapproval process so it does not harm your credit. It’s often the best source for fast cash and the quickest way to reliably find your best offer.
11. Don’t Review Loan Agreement
Once you’ve decided on a loan, the lender will send your loan agreement for review. This document includes important information such as the interest rate, payment amount, due dates, and fee schedule. It also mentions any fees and penalties involved in the loan as well as details on automatic withdrawals.
It is very important that you review this information. Once you sign the document, it is a binding contract and you could incur unnecessary fees and penalties.
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