Smart Borrowing: Avoiding Common Pitfalls in Loan Application

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A Bankrate poll reveals the negative consequences of personal loan denials — eight in ten (82%) rejected applicants reported financial strain. 

In search of alternatives, nearly a quarter (23%) turned to riskier options, with interest rates skyrocketing as high as 650%. This shift to high-cost borrowing highlights the challenges faced by those denied access to traditional loans. 

People need to understand the terms and implications of loans to avoid taking on more debt than they can reasonably repay, which can lead to financial difficulties later. If you don’t want this to happen to you, read on. This post will discuss common loan pitfalls and smart tips for avoiding them. 

Common Loan Application Mistakes

Taking out a loan is a big deal and can be nerve-wracking if this is your first time doing it. On top of that, it’s easy to mess something up on your application without even realizing it. That’ll just make the whole process take longer and cause more headaches. 

Here are some cases people usually need to catch up on so you can avoid them.

Not researching your options

When taking out a loan, checking your options before committing to anything is essential. Different lenders can have varying interest rates, repayment timelines, and fees. Taking time to look at your choices could uncover an even sweeter deal than what you first found. Don’t just go with the first offer you receive. Do your homework so you get the best possible loan for your situation.

Neglecting the fine print

Not reading the fine print can sometimes get you into trouble. Some people sign up for a new credit card without reviewing the details. A few months later, they’ll be surprised by an annual fee printed in small text. Don’t be like them.  

It’s always important to take the time to read through all loan-related documents before agreeing to anything, especially things like loans or credit cards. It can be tedious to go over all those details, but it’s worth it to understand what you’re signing up for. The last thing you want is a nasty surprise down the road because of something you missed.

Make sure to read the entire agreement, even that small text. Note things like interest rates, fees, and payment timelines—all the essentials. That way, you’ll know what to expect with payments and other necessary matters. 

Having all the information helps you plan your finances better. Spending extra time upfront is better than getting stressed out later because you failed to read the fine print. 

Not setting a budget

Not having a budget can get you into trouble when applying for a loan. With a reasonable budget, knowing how much you can afford to pay each month is more accessible. When the loan officer asks you how much you think you can handle monthly payments, you want to avoid just taking a wild guess. 

You must write out all your expenses—items like rent or mortgage, utilities, phone bills, groceries, gas for your car, and anything else you spend money on regularly. Only then will you get a clear picture of what’s coming each month versus what’s going out.

Not clear about your needs

Not knowing your actual needs can get you in trouble. Many people don’t consider exactly how much they’ll need when taking out loans. They guess too high without crunching the numbers and then pay interest on money they didn’t use. 

It’s always better to work out your budget and determine what will cost you to the last dollar. That way, you only borrow what you need and nothing extra. The less you borrow, the less interest you’ll pay back. Get quotes for whatever you buy and factor in all the fees and taxes. 

Remember your other monthly bills, too. The more accurate you are, the better deal you’ll get on your loan. A little math upfront can save you money in the long run.

Underestimating the necessary paperwork

Filling out all that paperwork for a loan can be overwhelming. There are a million different forms where you have to put all your personal information, income details, existing debts, you name it. And that’s not even counting having to dig up statements and documents to prove everything. 

The worst part is if you’re missing even one little thing, it can screw you over. Did you forget to include your last proof of income? Didn’t you sign the bottom of page 4? Sorry, the bank or lending institution can’t go through your application. The process takes forever if you must be on top of all the nitpicky details. 

So, the best thing to do would be to set aside a big chunk of time to perfect everything. Go through the checklist line by line and double-check that you have every last form and paper the loan provider requires. A little preparation goes a long way. Completing your application the first time can ensure a hassle-free loan process.

Being dishonest 

It’s essential to be truthful when applying for a loan. Lenders will verify all the information you provide by checking your credit report and other documentation. Your loan could be rejected if they find any inaccuracies or lies in the application. 

You may have seen it happen to others—they fibbed about their income, employment history, debts, or assets, thinking the lender wouldn’t notice. But these lenders always fact-check everything. The application goes straight into the trash as soon as inconsistencies are uncovered.

Not checking the hidden fees 

Some lenders will try to sneak in all kinds of extra costs to raise your loan amount. To avoid these surprise charges, you must read the fine print carefully and know what fees might be lurking. 

Origination fees, application fees, and late fees are some big ones you always need to watch out for. The lenders won’t always make those clear upfront. 

An origination fee is their cut for processing your loan. An application fee covers their costs for reviewing your paperwork. Late fees are charged if you miss a payment.

The best thing to do is to know what those standard loan fees are called so nothing sneaks by you. Refrain from assuming the number they quote is what you’ll pay. 

Protect yourself and your wallet by being informed. Understand what extra costs might apply before signing on the dotted line. That way, there won’t be any nasty surprises when it’s time to make your payments.

Believing guaranteed approval claims

Those ads that promise “guaranteed approval” always seem a little fishy. Why would any lender approve a loan without considering someone’s financial situation? That’s just asking for defaults down the road. 

One can understand the temptation when you’re in a tough spot and need money. They make it sound so easy: Just fill out one form, and the cash is yours, with no questions asked. But there’s usually a catch, right? You have to read the fine print. There are hidden fees or a high interest rate to compensate for the risk. 

And what happens if you can’t repay it? These people aren’t going to be easy on you just because they approved the loan without checking your ability to handle it. No, they’ll come after you hard with late fees and penalties. Before you know it, you’ll be worse than when you started.

If something sounds too good to be true, it probably is. Any legitimate lender will want to verify your income, debts, and credit history to ensure you’re a reasonable risk. Feel free to shop around and compare rates from established banks and credit unions. A small amount of extra work upfront could save you big headaches.

Image by Andrew Neel on Unsplash

Shop Around Before Deciding

Loans can help you achieve important goals, but we must be careful, too. There are a few things people should watch out for. Some not-so-good people out there try to scam others, so you want to make sure any loan you get is legit. 

It’s also good to shop around and compare rates from different places. That way, you only borrow what you need. And make sure to read all the tiny details in the agreement — sometimes companies sneak extra fees in there.