There is always something about applying for a loan that can be intimidating or make us uncomfortable.
Regardless of the type of loan you seek, whether a big loan like a home loan, education loan, car loan and business loan, or a small loan such as loans for moving house, or short-term business loans, the decision always seems like a twisted one.
It’s possibly the thought of someone going through your financial history, or maybe that of being turned down by the bank.
However, there is nothing frightening about applying for a loan despite the many prevalent misconceptions.
There are some common yet significant mistakes that people make while applying for a loan, particularly first-timers.
However, identifying and staying away from them will give you confidence in dealing with the whole process.
In this article, we discuss five common mistakes that people make while applying for loans, and what you can do to avoid doing the same.
Common Mistakes While Applying For New Loan
But there are certain things you need to clarify before applying for loans to make sure you get approved for your applied loan.
#1: Not Checking Your Credit Score
Before you plan on applying for a loan, you must always check your credit score.
A credit score is a number based on your credit record and current debt status with which bank or lender gets a fair idea of how reliable you are as a borrower. In short, it’s a reflection of your creditworthiness.
Simply put, banks use credit scores to determine the interest rates and/or whether a loan should be sanctioned to you.
Furthermore, being aware of your credit score gives you more power to negotiate, as a decent credit score implies a lower interest rate on a loan.
You must examine your credit score carefully and regularly to ensure that there is no error. Any anomaly ought to be promptly informed to the credit rating agency for prompt rectification.
At the same time, if you want to improve your credit score, you must clear all outstanding dues, such as previous debts, pending bills, and so on.
Through this, you can significantly increase your chances of getting a better interest rate on your future loans.
#2: Limiting Your Loan Options
When searching for a loan, you should refrain from jumping on the initial or first loan offer you get. Doing so could cost you a lot more than is necessary.
Multiple specialized websites available on the internet help you select the best loan offer with the appropriate interest rate by listing and comparing offerings from various banks.
A majority of these websites are equipped with a loan calculator feature, through which the user can get an idea about his/her EMIs.
It is imprudent to limit your choices only to loans offered by your personal bank, or with that of a bank in your locality.
For instance, it is frequently seen that small banks, in some cases, offer the best loan options at lower interest rates.
Different banks and NBFCs (Non-banking financial companies) have different terms on their loans, ranging from interest rates to loan repayment terms and extra fees.
You must carefully examine features such as interest rates, loan terms, fees, fixed or fluctuating Rates, flexibility, and more to make an informed decision.
If the financial institution is unable or unwilling to answer your questions on the aspects mentioned above, it is best to remove them from your list.
#3: Not Reading Through the Terms and Conditions of the Loan Carefully
No one loves to sift through tons of terms and conditions. They are lengthy, exhausting, and loaded up with technical jargon that you might find difficult to understand.
However, it is imperative that you go through these for any loan you’ve applied for. You won’t enjoy it, but you have to understand what you are getting yourself into.
While most of the information about fees and payments is provided beforehand, you ought to remain vigilant about the bank’s intention of charging any hidden fees.
This includes expenses like documentation charges, charges to change the loan term, late installment charges, and more.
There can be plenty of such hidden charges that you may not comprehend at first, but you will find them present in the agreement’s terms and conditions.
If you encounter any difficulty in understanding, feel free to reach out to the bank authorities.
#4: Not Properly Assessing Your Financial Position
Before you go out looking for a loan, it is essential to understand your financial position.
- Firstly, It will help you to ascertain how much credit you need.
- Secondly, you could figure out whether you would be able to bear the weight of paying the EMIs alongside your current expenses.
Repaying the principal sum, in addition to the periodic interest amount will add your expenses or financial burden, and must thus be given a great deal of thought.
For this, you must understand how much cash you can manage to raise as a credit when needed.
the best part is to plan your overall income and divide it into three parts.
- 1/3 should be set for your own expenses.
- 1/3 should be for future savings to support in case of emergency need.
- 1/3 should go to the EMI’s
If you have planned your finance accordingly then at least you will have much clarity on how much loan you need and I don’t think any bank will reject your application if you asking the amount which is able to pay.
#5: Unclear Disclosure of Your Income, Assets, and Liabilities
This is undoubtedly the worst mistake you can make. While you may be enticed to conceal some details about your income and liabilities, doing so is considered fraudulent.
As soon as a lending authority notices any distortions in your data, you won’t be given any loan.
Moreover, if the bank officials realize that you have lied about your income, assets, and liabilities after acquiring the loan, they reserve the right to ask you for prompt repayment.
They will also presumably inform the authorities about your fraudulent actions, and you might even face criminal charges.
The main reason why moneylenders need to know about your financial circumstances is that they should give you credit that you won’t experience any difficulty paying off
While this might upset the borrower who might be looking forward to a large amount, it’s easier to deal with an installment that you can afford than the one you cant.
#6: Have Some Transactions in the Bank
I know it seems pretty much odd but imagine if you went to lend money to someone what are the odds he will give you money instantly.
What, if you have done similar transactions earlier then chances are very high you will get a loan immediately but in the case of the bank if you are visiting first time for a loan then, of course, you are under their radar to confirm your credibility.
In that case, the best bet would be to hold some amount in the bank either a recurring deposit or a fixed deposit, or have a regular transaction with banks.
This gives them solid proof that you have money coming in coming out and you are not out of the blue coming to get money but you are their regular customer.
So if you feel that you need money in the future then plan from today to have a relationship with banks.
#7: Decide Purpose, Duration, and Amount of Loan in the Beginning
While you visit the bank the first time and ask for a loan the bank manager probably asks you three questions for sure how much amount of loan, for what purpose, and for how much duration.
Of course, all three are very important to answer, as the purpose of the loan is key and interest rates will vary based on the types of the loan but always focus on the duration.
If you have not good credit history or not done any transactions before then the chances are very high, they might ask you to reduce the amount or the tenure.
Well, if you remember the early discussions we had, always keep in mind how much you can pay every month for EMI as the banks not only ask you to repay the Sum but also the Interest rate as part of EMI but will also charge a pre-closure fee if you need a loan for a short duration.
So don’t forget to ask them, how much you ended up paying if you close this loan after a certain duration of time before its actual end date as the banks initially charge a lot of interest and less credit to your principal amount.
So if you find that the bank is only approving small amounts and even for high-interest rates,s then better to take from friends or family members.
#8: Have a short loan from any Bank?
This rule is simple and only opted if you rejected for a higher loan. Yes, this time you need to build a history with any bank, which you can use with other banks to showcase how reliable you are.
While you are in need of a large amount of loan better to ask first what amount you are eligible for, no matter what that bank says go for it even for a short period of time.
So you can close that loan very soon and while paying the EMI, you can approach to same or another bank for a higher loan application. This time you can request for a higher or remaining amount which you are in need.
As you already paying EMI timely, your credit history and credit score will be better and that makes your chances of getting the application approved instantly.
So take your decision wisely based on your need and plan this from now itself, how you can avoid all these mistakes or turn them to your advantages.
While applying for a loan, all you want is to get the loan application process right. Being cautious and avoiding the mistakes mentioned above will help a great deal in making its approval much simpler.
It will also ensure your peace of mind, knowing there are no errors in your application, but my strong suggestion is never exceeding the loan amount EMI more than 1/3 of your monthly income.
Hope you find this info useful and if have any query then better show up your query in the comment box.