Five mistakes to avoid when taking out a loan
From time to time we all need some extra financial help, whether it be a car loan when the car runs into trouble, a personal loan for when an emergency arises, or a consolidation loan to consolidate current debt. There are steps to take when you take out a loan, such as research into the type of loan you need, comparing and finding the best deal, and then gathering all of the required information and submitting it to the lender. But what are the mistakes that you should avoid?
- Not checking your credit score
- Disregarding the fine print of your loan agreement
- Making other large purchases on credit
- Changing jobs
- Applying for the first loan you find
Not checking your credit score
It sounds simple: checking your credit score before you apply for new credit, but many people make the mistake of forgetting to do so and end up getting rejected. A missed phone bill, late payment on current debt or too many hard searches in a short period of time can all negatively impact your credit score. Before you apply for any sort of credit it can be a good idea to check out your most recent credit report and see for yourself if there are any improvements to be made.
As well as the chance of getting your application rejected, a bad credit score can also affect the amount you can lend, in addition to the interest you could end up paying back. There are free ways to check your credit score, with some providers also offering free trial periods to help you understand your current financial situation.
TIP: if your credit score is not what you expected, and you do need to improve it, we have put together 10 simple steps to improving your credit score.
Disregarding the fine print of your loan agreement
If you're in a hurry and just want to get the application finalised and closed off, you may be inclined to overlook the terms and conditions of your new loan. However, by doing so you may miss important information that ultimately means you could be held liable for additional fees or penalties for paying off your loan early, for example. Whilst many lenders do not charge you for paying off your loan early, as it's great that you are in a position to do so, some may.
So it’s very important to check for any hidden fees and restrictions within the fine print of your application.
It may be a boring job, but it does allow you the chance to ask questions and speak up about any red flags that may crop up before you finalise your agreement. Once you’ve read and digested the fine print of your loan, you may be able to speak to the lender if there are some areas you don't agree with, to get your questions answered and ensure a transparent transaction.
Making other large purchases on credit
We understand that there will be times when you may need to take out more than one form of credit at the same time, such as getting a mortgage and also needing to take out a loan and a credit card, perhaps to do some renovating in the new house. However, taking out a large amount of credit within a short period of time can have a negative effect. When lenders are assessing whether they can lend to you, they will look at your income, as well as what you are paying out, so if they see that you have suddenly increased your debt, you may no longer be eligible for a lower interest loan or they may reject your application altogether.
As well as harming the chances of getting a loan, it may also negatively affect your credit score if you take out several forms of credit at the same time. The good news is that as you build up a record of consistently making repayments on that credit, your score will begin to increase again.
TIP: If you do need to make a large purchase such as a home renovation you could speak to you mortgage provider about borrowing a further advance if your house has increased in value since you bought it.
Changing jobs
Lenders want to see that you have a stable flow of income each month to ensure that you can afford your repayments. If you change jobs just before applying for a loan, it may harm your chances of getting accepted as your employment may appear to be less stable.
Being new to a job may seem more of a risk to a lender, because most employers give a probationary period of one to six months, during or just after which they can terminate your contract without giving any further notice period.
Applying for the first loan you find
It may take additional time, but it can be worth researching loan options, instead of simply taking out the first option that you can afford the monthly repayments on. However, if you shop around and take your time to learn about the different types of loans available, you may find one that is more suited to your needs. It is also important to take into consideration both the interest rate, as well as the repayment term to ensure that you are getting the best deal for your needs.
It can be tricky to understand all aspects of a loan, and terminology can be confusing, such as APR. For more information on what APR means, read our handy guide to what APR means for you.
There are many factors that you should look out for before applying for a loan; one of the main points would be to compare options to find the best loan for your needs, as well as ensuring that you can consistently meet the monthly repayments.