Avoid These Mistakes When Applying For a Loan
Whether applying for a personal loan or a business loan, there are often one or more common mistakes businesses and individuals make when applying for a loan. Avoiding these mistakes is most important in being approved for a loan. These are the most common loan application mistakes that can cause problems with getting your loan approved.
1. Not understanding or questioning the loan terms before you sign.
To avoid the most common loan application mistake, make sure you read and completely understand everything about the loan before signing. Take the time to read all the fine print and make sure to ask questions about everything you don’t fully understand. Individuals are often anxious to get the loan and fail to pay attention to the details. Don’t think or assume the terms on the loan are the same as any other loan. Know what you are signing before, not after, you sign.
2. Being uninformed of your credit rating.
Before you attempt to apply for a loan, know where you stand creditwise. Request copies of your credit reports from the three major credit reporting agencies, Experian, Equifax, and Transunion. These reports will indicate whether you’ve made your payments on time, if you’ve ever defaulted on a loan, declared bankruptcy or had any other financial problem. It will also show positive items such as when you’ve paid your bills on time or when you’ve paid off a loan. Consistently paying your bills on time shows that you’re worthy of a loan and is attractive to a lender. If your credit has undesirable listings, make sure you’re aware of them and be prepared to explain them to the lender.
3. Not explaining in detail the need for the loan.
Another common loan application mistake is not fully explaining what the loan will be used for. If the loan is to be used for business purposes, explain the details of how the money will be used. Lenders want to see that you know exactly why you need the money and how the loan will meet those needs.
4. Continuously searching for a lower interest rate.
Interest rates fluctuate often. People often make the mistake of waiting to see if rates will drop even farther before locking in on that rate. If you’ve found a great rate, lock it in before the rate increases. Continuing to search for an even lower rate often works against you, especially if you have to wait longer to get the loan that you might need immediately, or worse, if the interest rates actually increase instead of drop.
5. Applying only to the most convenient lender.
Avoid the mistake of not shopping around for other lenders aside from the bank you normally do business with. Check into taking out a loan with a credit union. If you’re looking for a small business loan, consider programs offered through the Small Business Administration. You can also correct this loan application mistake by making a few phone calls to check lenders’ rates and offers.
6. Making major loan application changes.
Because you need to show the potential lender you are stable and can make solid decisions, don’t apply for a business loan, for example, and submit a loan proposal, only to tell the lender later you’ve reconsidered and plan on using the money differently than what was stated on your paperwork. Make your decisions beforehand and submit your proposal only when you are 100 percent sure of your actions.
7. Not having any equity.
Having some equity, such as a down payment, can significantly increase your changes of securing a loan especially for a business loan or a home loan. While this is sometimes unavoidable, just know that lenders are not particularly enthusiastic about offering loans to those without equity, especially loans for large amounts or for individuals with poorer credit scores.
8. Not having current finances organized properly.
Don’t apply for a loan without proper financial documentation. This can either delay the loan process or cause the lender to immediately turn you away.
9. No business plan for a business loan.
Having no business plan or using a poor one is an inexcusable loan application mistake, but can be easily corrected. If you’re just starting a new business or looking to expand an existing one, you must demonstrate to the lender how your business will operate and make money. A lender needs to see your goals and see how you plan to reach those goals. For this a business plan is essential.
10. Not checking for hidden loan costs.
The loan you’re apply for might include fine print stating that annual fees, bank charges, closing costs, commissions and balloon payments are required. Avoid signing a loan that contains hidden costs. Be aware and don’t sign anything without being completely sure what it means.
11. Having no collateral.
Having no collateral gives no assurance to the lender that the loan will be repaid. Having collateral increase the chances of getting the loan approved. Collateral can be automobiles, savings accounts, home equity, certificates of deposit (CDs) and anything else the lender considers to have value.