Whether you're applying for a mortgage or an auto loan, recognizing common loan mistakes can ensure that you get the best deal possible. Financing a purchase can get expensive. In most cases, the bank or lending institution will charge interest. And if you don't understand how loans work, you could end up spending more than necessary. For that matter, here are seven common loan mistakes you should not make.
1. Not Shopping around
It doesn't matter how eager you are to get a loan, it is important that you shop around. This is one of the best ways to avoid common loan mistakes. When you shop around, you learn all your options, which makes it easier to compare available loans and choose the product that's best for you.
2. Borrowing More than You Need
After looking at your finances, a bank may say that you qualify for much more than you need. It's tempting to get a larger loan, but the more cash you get, the higher your monthly payments. Since this can potentially complicate your finances, only borrow what you need — and nothing more.
3. Ignoring Your Credit Score
It's possible to get financing with a low credit score, but you won't get the best deal on your loan. Some people ignore their credit report and credit score when applying for financing. However, if you check your record beforehand, and make improvements to boost your score, there's a chance that you'll qualify for a better rate.
4. Not Understanding the Loan Terms
If you're not familiar with loans, it's perfectly okay to ask questions. In fact, many lenders encourage this. If you don't understand the terms of your agreement, you might accept a loan that's too expensive, which can trigger payment problems in the future. Always read paperwork thoroughly, and ask questions if you need clarification. If you're not comfortable with the terms, do not finalize the deal.
5. Major Financial Changes before Applying
Major changes to your personal finances can impact whether you qualify for financing. Therefore, if you plan on applying for a mortgage loan, this is not the time to quit your job or explore self-employment. Often times, lenders require two years of steady employment, and they prefer your income to remain the same or increase during this period.
6. Not Keeping Accurate Records
To qualify for a loan, you will need to provide the lender with basic information regarding your income and employment. And unfortunately, if you do not keep accurate financial records, the lender may reject your loan application. The honor system does not work when applying for loans. If the bank cannot verify your income, a banker will conclude that you don't have the resources to pay back funds.
7. Not Providing Equity
If you have a high credit score, you might be able to get an unsecured loan. With these loans, the lender does not require collateral. But while you might be eligible for these types of loans, understand that these loans carry a higher interest rate. The higher your rate, the more you'll pay for the loan. Therefore, to keep your loan affordable and your payments low, it’s best to pledge collateral — such as a free and clear car title or other valuable belongings.
Sometimes, applying for a loan is the only way to get the things you need. But the fact that you need a loan does not imply accepting terms that you're not comfortable with. What are other things to take into consideration when applying for loans?