Don’t Make These 5 Common Mistakes while Applying for a Loan

October 21, 2021 Mutual Fund

Loans offer financial support, from necessities like medical expenses, buying a house to luxuries like planning for a vacation or buying an expensive smartphone, we avail of loans for several reasons. People usually hesitate to ask money help from their family, friends and relatives as they consider taking a loan is the best option. Although most of us are familiar with the loan application process, there is still something intimidating about applying for a new loan. If you are a first-time borrower or have already faced a loan rejection, applying for a loan can become even more stressful. The main reason many people find it frightening to apply for a new loan is that they are scared of the loan application getting rejected. This article will let you know the five common mistakes most people do while applying for a loan and how you can avoid them.

1. Applying for a loan without thorough research:

When applying for a loan, it is important that you do a thorough research as loans are usually long-term commitments. Doing thorough research before applying for a loan will save you from financial problems in future. Most people generally do not check and compare the various available loan options and directly apply for a loan advised by their lender. For example, if you are planning to renovate your house, instead of opting for a personal loan, you should consider home refinancing as it generally has a lower interest rate compared to the personal loan. However, if a lender is offering a better deal on a personal loan than home loan refinancing, then it makes sense to avail of a personal loan. The comparison of different types of loans will help you to choose the right type of loan for yourself.

Once you have finalised the type of loan that is suitable for you, it is advisable to compare the rate of interest of different banks and Non-Banking Financial Companies (NBFCs). A small difference in the rate of interest can make a substantial difference in the total loan outgo. Lower rate of interest will help you to make a wise decisions to borrow the loan. Moreover, apart from the rate of interest, make sure you compare the processing fee, foreclosure charges, etc. as well.

2. Not checking your credit score:

Higher the credit score lower the rate of interest. A credit score is a three-digit number that shows your creditworthiness. When you apply for a loan, the bank or NBFC first checks whether you have a sufficient credit score to be eligible for a loan. If your credit score is less than 700-750 points, your loan application might not get approved. Therefore, it is advisable to check your credit score by yourself before applying for a loan. Checking your credit score periodically is a good practice as you will be able to see if there are any errors in it. If you find any mistakes or errors in your credit score you can get them corrected with a credit bureau.

Apart from the use of credit score for loan approval or rejection, it is an important factor that determines you getting lower rate of interest. Having an excellent credit score means you have a very good loan repayment history and your profile is less risky for the lenders to offer you loans. Therefore, applicants with an excellent credit score are generally offered a lower rate of interest compared to those with an average credit score.

If you do not have a sufficient credit score to be eligible for a loan or you want to get a loan at the lower rate of interest, then it is advisable to work on improving your credit score and then apply for a loan once it is improved. You can check your credit score directly with the credit bureaus or there are various websites that offer credit score checks for free. Although it is not advisable to check your credit score repeatedly, you should check it once or twice a year or before applying for a loan to ensure there are no errors.

3. Applying for multiple loans in a short period:

People often apply for a loan with multiple banks and NBFCs to check where they can get the best offer. When you apply for multiple loans you harm your credit score. However, these multiple lenders check your credit score with credit bureaus to assess your creditworthiness. The multiple credit enquiries in a short span of time can give an impression that you are in a desperate position to avail loan and it can also question your repayment capacity.

Therefore, it is advisable not to apply for a loan with multiple lenders in a short period as it can damage your credit score. Instead, you can do an online comparison of multiple lenders and choose the one that offers the best deal. While checking your eligibility for a loan online, lenders perform a soft credit check, which is considered safe as it does not affect your credit score.

4. Not assessing your repayment capacity:

To ensure that you will timely repay your loan, in addition to checking your credit score, banks and NBFCs evaluate your income and repayment capacity. Your loan application can get rejected if your income does not match with the amount of loan you have applied for, or if you have already borrowed more than your repayment capacity. Remember the old saying ‘don’t borrow more that you cannot repay’. Always make sure that you apply for a loan amount that you are eligible for. If you have a requirement for a higher amount, it is advisable to wait until you are eligible for it, instead of creating a debt that becomes difficult to repay.

5. Not providing complete documentation:

Many people usually ask the lender for a list of required documents after they have applied for the loan. However, if you do not have specific documents that are mandatory to process the loan, your loan application will be rejected. Therefore, it is crucial to get a list of required documents from the representative of the financial institution before applying for the loan and ensure that you have all the documents handy. It is advisable that you submit the necessary documents immediately as the lender can hold or reject your application if you delay submitting the documents. Moreover, make sure your personal details, such as name, date of birth, etc. matches on all the documents or you have supporting documents ready.

To Conclude:

These are the top 5 common mistakes people do while applying for a loan, which can result in loan application rejection or not getting the best deal. A loan is a long-term commitment that involves your money, time, and emotions. Make sure you choose your loan wisely by comparing different available options. Carefully read and understand the terms and conditions before applying for a loan.

This article first appeared on PersonalFN here