Funding an important purchase or business may require you to take a loan. Most borrowers are wary of borrowing money from lenders because of the accompanying fees and interest rates. There’s also the downside of lowering your credit score if you fail to pay back. Meanwhile, it may seem a hassle for some to apply for a loan and meet several requirements.
Well, you have to understand these disadvantages, but never forget that you have the advantage of securing the much-needed money to fund your purchase or business. You can avoid or minimize the downsides of taking a loan if you know what to do before you apply, where to look for a lender, and how much to borrow.
There are common mistakes that borrowers make when applying for a loan, and you must avoid them at all costs. Take note of the list below.
Mistake #1: Not Making a Credit Score Assessment
One of the indicators that a borrower is eligible to take the loan is his credit score. Lenders will see to it that you provide your credit score because it tells you’re a good borrower. You’ll likely get approved by the lender and borrow a higher loan amount if you have a good credit score.
Moreover, lending companies offer borrowers with high credit ratings affordable interest rates. So, before you borrow money from a lender, you should look at your credit score to see if it’s good enough to enable you to avail yourself of such perks. Then, try applying for online loans at GoodCheddar if you need to borrow money.
Mistake #2: Failing to Understand Your Financial Situation
Understanding your financial situation is crucial before planning to take any loan. First, assess how much your monthly income and your average monthly expenses are. Based on your assessment of your financial situation, you can get an idea of how much money to borrow and how to pay it back.
The worst mistake you can make is to borrow a higher loan amount that gives you trouble repaying it. And most people who commit this blunder fail to assess their monthly income and spending. If you borrow money that is higher than what you’re making, chances are you may default on your loan.
A loan default lowers your credit score and puts a dent in your credit history. If your credit turns awry, applying for the next loan and availing of lower loan fees and interest rates will be challenging.
Mistake #3: Preferring a Longer Loan Term
Almost all money borrowers want to secure an affordable loan. But be wary of picking a loan that takes you longer to pay. While there’s a possibility to spread out your total payment during that period and avail of a lower payment every month, it can cost you more than necessary.
Just do the math and see the bigger picture to realize it. Consider inflation and the interest rate that adds up to your monthly payment if you prefer to pay the loan for a longer period. The smart thing to do is to choose a shorter loan term and pay the loan on time. This approach sets you free from your debt faster.
Mistake #4: Getting Multiple Loans at the Same Time
Avoid getting multiple loans simultaneously because it can increase your debt-to-income ratio. A higher DTI is a bad indicator to lenders, making it difficult for you to apply for a loan the next time. You should keep your DTI at or below 43% to get approved for financing easily and get affordable interest rates.
Another disadvantage of carrying multiple loans simultaneously is you risk falling into a debt hole. Just take a loan that you can afford to avoid additional financial burdens.
Mistake #5: Not Reading the Loan Agreement
Read the loan contract to ensure that the things you’ve agreed with the lender are on paper. Sales talk or any marketing tactic to entice you to get the loan might not be on the written contract. For example, it’s common for some lenders to promise you lower interest rates and loan fees, but it may not be different from other exorbitant loans.
Ensure that the interest rate, fees, and loan term on the contract are what the lender promised. Read the fine print carefully and check for additional costs that will get you in financial trouble. Avoid a lender with a shady record by visiting its website and reading customer reviews.
Final Thoughts
Be careful when borrowing money from a lender. Ensure you have a good credit score to get lower interest rates, and you should be able to repay the loan to avoid falling into a debt cycle. Choose a loan with a shorter repayment term to pay it faster. Moreover, read the agreement before signing it.