Easier said than done, you say. Well we’re here to help; keep reading to find out about the six most common mistakes people make when applying for a personal loan.
1) Lack of research and / or comparison
There is an idiom which tells one to “test the waters”. The same applies when choosing a personal loan. It’s not only vital to conduct proper research; you’d need to spend time exploring available products in the market for the product that best suits your needs. It wouldn’t do for you to just throw yourself wholeheartedly into the first low interest offer that comes your way.
Know your financing options well and find the most competitive rates available by visiting trusted credit sources or by using verified comparison tools online. Consult with financial experts to learn about possible alternatives that you can also explore, and have them help you to establish terms and a repayment plan that is both reasonable and achievable.
Do not hesitate to ask your credit representative about any concerns you may have, regardless of how silly you think your questions may sound. Remember, there is no such thing as a stupid question.
2) Disregarding your credit score
Your credit score is one of the most important factors that banks take into account when determining whether or not to approve your loan, as well as what interest rate they’re about to quote to you.
Through your credit score, banks can find out how punctual you have been when it comes to paying your bills and equated monthly installments (EMIs). If you always repay your debts on time, then you have no reason to worry, since your credit score will be good. A good score to maintain (according to the general guideline by CTOS) is 697 and above, based on an easy-to-understand three-digit system.
However, if you have a low score, you should try to fix it first by repaying any outstanding debts before you apply for a personal loan in order to avoid having to settle for unfavourable terms. Check out Everything You Should Know About CCRIS for more guidance on how to improve your credit score.
3) Failure to read the fine print
When applying for a loan, it’s easy to miss out seemingly minor details in your contract due to carelessness (or even sheer indifference). This will lead to you having to pay exorbitant fees in the long run. Why do you think lending institutions make you sign dozens of documents for a loan agreement?
It’s not for your reading pleasure, that’s for sure. Remember that each signature is proof of your acknowledgement and acceptance of the terms. This is usually included in the fine print stating that annual fees, bank charges, closing costs, commissions, length of loans and balloon payments are required.
Ensure that you’re well informed and have read the hidden clauses of the agreement. Be aware of the interest rates and the penalty costs on late payments before signing any documents. Ask for a sample of the loan agreement for you to take home so you can read it thoroughly overnight.
Patience is a virtue, and when it comes to taking out a personal loan, it pays to channel your inner Mandela. Or Ghandi. Or a tortoise. Tortoises are patient, right?
4) Incomplete disclosure
Don’t leave any ‘ifs’ or ‘buts’ when filling out your loan application form. Make sure to fill all your personal details with complete honesty and be as precise as possible. Incomplete disclosure or providing false information may hurt your credit rating and can even lead to legal action being taken against you.
As a result, not only will you be forced to repay your loan immediately but you may also be charged a hefty fine for committing fraud. Remember – a genuine and comprehensive loan application is a good loan application.
5) Going overboard
Before applying for a loan, always make sure to estimate the amount of money that is required to suit your needs. A personal loan charges a high interest rate since you are not required to disclose the reason for taking the loan or provide any collateral for it. Therefore, don’t fall into the trap of thinking of it as extra ‘free’ money and commit to a large debt.
Exercise extreme caution whenever you’re borrowing large amounts of money because the larger the loan, the more cost is attached to it in terms of interest and recurring expenses. Borrow just enough for your purposes, and no more than that. It’s a loan - not free money.
6) Patchy paperwork
Okay, so you’ve been really busy – we’ve all got those days. Hunting for the best loans takes time, and you have so many more important things to worry about than getting your documents in order. Paperwork? Nope, no time for such tedious trivialities.
Listen up though. ALWAYS make sure to take some time to organize your paperwork so that the lending institution is confident about your credibility. Don’t cut corners. No one’s going to trust – or like, for that matter – someone with a box of crumpled papers filled with illegible writing. Always state your nett salary instead of your gross salary to avoid confusion.
Additionally, make sure to file your Income Tax Returns (ITRs) regularly even if you are an average earner as banks always ask for your ITR as a criterion before granting a loan. One other thing you should be careful about is to mention your residential address in your paperwork correctly, as lenders may ask for proof of lease or utility bills to prove you have been living at your address for some while.
So if you’re planning to sign up for a personal loan, make sure to avoid these 6 mistakes in order to save yourself from having to go through the painful ordeal of a messy loan cycle. Don’t say we didn’t warn you!