The intimidation is real when you’re applying for a loan. Maybe it’s the thought that a stranger will look at your financials, or perhaps the fear of being denied. But the truth is, this experience shouldn’t feel as overwhelming as it often gets.
You can run into some mistakes when you’re applying for a loan, particularly when you’re doing it for the first time. That said, being aware of these mistakes and knowing how to avoid them can make you feel safe and confident.
Not Knowing How Much You Need
Applying for a loan is daunting, and not crunching those numbers before you apply can have a detrimental effect. You first need to understand the kind of numbers you’re dealing with.
- What is the ball-park amount you need?
- How much can you afford to pay back every month?
- How many monthly payments can you make?
On paper, it’ll look like you can take out a bigger loan than what’s possible. That’s why you shouldn’t ignore a realistic assessment of your finances.
Not Knowing Your Credit Score
Another mistake people make is that they don’t check their credit score before they apply for a loan. This number shows your current debt levels and your credit history. It gives the lender an idea of how trustworthy you are and whether they should loan you the amount you’re asking for. If your credit score is low, you may get a higher interest rate or not get the loan altogether.
You can get a free copy of your credit score from any three big credit reporting companies. Those are:
If your credit score is lower than 600, you should consider taking at least eight months or a year to increase your score. Pay down the debts you owe, pay all your existing bills on time, and if there are any outstanding bills, pay them off ASAP.
When you build a habit of this, you’ll qualify for an improved (read lower) interest rate, which will, in turn, save you money. Moreover, paying off existing debt will also put you in a better position to afford the new loan payments.
Not Looking Around
When you’re all set to apply for the loan, it may be tempting to jump in with the first option you find. This is a costly mistake. By surveying the market and meeting different lenders, you’re going to find other options that offer you the amount you’re looking for at a lower rate.
When you don’t look around, you strive for a higher interest rate, which results in heftier payments. Over a loan’s lifetime, the differences (albeit small) can accumulate to a large amount once you’re done paying off the loan.
Not Reading the Fine Print
We know; most of us don’t like reading lengthy terms and conditions. They’re boring, long, and filled with technical jargon we don’t want to understand. However, you must go through them when you’re applying for a loan. Even though it won’t be fun, you’ll know exactly what you’re getting yourself into.
When you read the conditions of a loan, you’ll get to know about any additional fee you may have to pay or possible options available to you if you run into financial turmoil. Remember: you’re going to pay off some loans for years, so it’s better you understand the rules before the agreement.
Not Sticking to One Loan
One detrimental mistake people make while applying for a loan is that they apply for several at once. People usually do this when they think their chances of getting a loan approved are slim. However, this isn’t an effective way of getting approved for a loan.
Your best bet is to apply for one and then take part in the waiting game. That’s also because a loan application is a hard credit inquiry that adversely affects your credit score temporarily. Once your score dips, you won’t be able to get a loan at the same rate.
That said, some lenders can offer you a “good-faith” estimate that doesn’t impact your credit score. You can get as many of these as you want without worrying about a shrink.
Not Being Honest About Your Income
This is perhaps the worst mistake you can make while applying for a loan. It’s easy to feel the temptation to exaggerate how much you make and how little you owe to someone. This is plain fraud. If a lender or their advisor recognizes that you’ve falsified information intentionally, we can guarantee that you’re not going to get the loan.
Even worse, if they realize you’ve lied about your income after they give you the money, they have the right to demand immediate repayment. They may also get the authorities involved, which may land you in prison for fraud.
Even if the lender never finds out, you can still get into trouble. The biggest reason a lender wants to know about your income is to gauge your payback potential. This can be frustrating if you’ve had your eyes set on a Tesla but can only afford a used Chevrolet. However, the comfort of knowing that you’ll be able to pay back the loan comfortably can be liberating.
Not Being Aware of the Collateral
Banks will always collateral as a way of keeping themselves safe whenever they’re extending a loan to you. Before you opt for a loan, understand what you’re willing to give as collateral. The value of what you give to the bank should be equal to the loan you’re taking.
Wrapping Up
By avoiding these mistakes, you can circumvent common mistakes while taking out a loan. Leveraging debt to your benefit is possible, but by all means, it should not be another stressor in your life that creates more problems than it solves. To maintain your sanity, do your research, stay on your toes, and be honest throughout the process – it’s not a complicated process.
