5 Mistakes everyone makes when applying for a Loan
There are a number of routes people look to take when they find themselves in situations of financial difficulty, some take a more relaxed approach and systematically work out ways in which they can save money. Others are more ruthless, and look to take out multiple credit cards.
One potential option is a personal loan; their flexibility means that they can be used for almost any purpose; some use them to fund a new car, carry out home improvements, consolidate debt or plan a wedding.
For many, this is a great solution to their financial problems and they therefore decide to apply without any real consideration of the long term effects the loan may have on their finances.
I’ve collected 5 of the most common mistakes people make when looking to apply for a personal loan, without further ado, here they are:
1. Apply for the maximum amount available over the longest possible term
The chances are there will be a reason you are taking out of the loan (this is what lenders will refer to as the loan purpose). It is important that you work out exactly how much you need.
If you are using the loan for debt consolidation purposes then calculate exactly how much outstanding debt you have, likewise if you are using the loan to buy a new car ensure that you know exactly how much the car is going to cost along with any expenses that may be attached such as tax and insurance.
Ensuring that you only borrow what you need will save you money on the monthly repayments and the total amount repayable.
2. Not ensuring you can afford the monthly repayments
So now you’ve worked out how much you require over what term, this should give you an idea of the repayments you will be paying if the loan is approved. At this stage many will simply hit the apply button – don’t fall into this trap!
As part of the application process lenders will carry out an affordability check, this will simply involve deducting all current credit commitments from their total income in order to calculate the applicant’s surplus income- lenders will need evidence that this figure is sufficient to afford the monthly repayments. If an applicant fails the affordability check, the lender will not be able to proceed with the application and will therefore decline it.
Ensuring that you are comfortable that you can afford the repayments will avoid any knockbacks. One way of reducing the monthly repayments is to take the loan out over a longer term; this will however make the total amount repayable slightly more in the long term.
3. Apply through a fee charging broker
There are 3 ways of applying for a loan; via a direct lender, via a comparison websites or via a broker. Brokers basically act as a middle man in the application process, they will take some basic personal and loan related details and then find a suitable lender from their panel and pass your details onto them.
The majority of brokers will make their money from getting paid a commission from the lender on the completion of a loan application- this service will be free. Unfortunately though there are still some brokers that charge a fee for their service, often this fee will be charged up front and can be as much as £80.
The best way to avoid broker fees is by going direct to the lender or using a comparison website, direct lenders are easily identifiable as they will state this on their website; they will also advertise the fact that they do not charge any fees for their service.
4. Ensure that you read the full terms of the loan agreement
This is always something you need to do regardless of what you are applying for; it simply avoids any confusion further down the line. Look out for things like late payment charges, early repayment terms, early settlement figures; these will all differ depending on the lender you are applying with.
For example; some lenders will allow you to pay the full balance of the loan off prior to the scheduled finish date, others will charge fee (known as an early settlement fee).
5. Research all possible options
There are a number of loan options available now; the one that suits you best will be based on your requirements of the loan; such as the loan amount you require. The repayment terms will also play a large part in your decision, for example; if you’re looking for a very small amount and would like to repay it in full then a payday loan may be the best option for you, if you’d like to pay it monthly then there are a number of options available.
Your credit history will also have a bearing on the types of loan available to you. If you have an immaculate credit history then you may qualify for a loan via your high street bank, however if you have bad credit then this will limit the type of loans available to you, you may still be eligible for a guarantor loan, logbook loan or payday loan.
Avoiding these common mistakes will not avoid any confusion but could save you a significant amount of money in the long term.
Author Bio: This article is written by Jason Scott a UK based finance expert who writes for a number of top finance related articles. His specialist subjects include the subprime loan market and guarantor loans for bad credit.