Before Applying For A Personal Loan, Avoid These Mistakes

Apply for a loan? Avoid these costly mistakes. (iStock)

If you are in the process of applying for a loan, you might consider closing other credit card accounts or ignoring your credit score, but that would be a mistake. While technology has made it much easier to apply for a loan, there are still a few common mistakes many borrowers make that could result in the loss of a loan, even after you have been prequalified.

Following these tips can improve your chances of getting a loan.

Stop spending

Once you know you’re going to apply for a loan, stop spending. It is especially important to tidy up your credit cards if you are applying for a mortgage. Your lender may reject your loan application even after receiving prior approval. While it can be tempting to go shopping for furniture, wait until the keys are in hand before loading anything.

Don’t apply for multiple lines of credit in a short period of time

Before you apply for a loan, shop around. Call and inquire about the interest rate ranges and fees associated with the loan. Seeking too many lines of credit in a short period of time can be a red flag for lenders. Keep in mind that when you apply for a home loan or car loan, the auto broker or company may manage your credit with multiple lenders. Too many credit inquiries in a year can hurt your credit score. Still, most scoring calculations take repetitive mortgage and auto loan applications into account, so your score won’t be hurt as much as if you had applied for multiple credit cards.

Don’t close old lines of credit

You might think that closing old accounts would be better for creditors, but that’s not true. If you are considering taking out a loan or other line of credit, avoid closing old accounts at least six months in advance. Closing old accounts will lower your debt ratio and may make it more difficult for you to qualify for the financing you need.

Don’t deposit a lot of money in your account without a record of where it came from

Keeping a record of all income is especially important if you are applying for a mortgage or other large loan. If you can tell the lender where it came from (a gift from your parents or grandparents, or income from a side business), the funds can help you qualify for a larger loan. If you can’t show where the money is coming from, you may not be eligible for a loan. Lenders want to make sure that you have enough funds to cover any loan they give you.

Check your credit score

You can save time and frustration by checking your credit score before applying for a loan. Checking in advance allows you to correct mistakes or clean up late payments or legal judgments, so you have a better chance of getting a lower interest rate on any loan you get. You may need to pay to view your credit score, but some credit card companies offer it as a benefit for using their services. Check if you have free access to your score. Otherwise, you can consult one of the three major credit reporting bureaus to purchase your credit score.

Watch out for penalties and fees

Check with your lenders about the fees they charge, including loan origination fees, application fees, and prepayment penalties in addition to the interest rate. The additional charges will affect the total cost of the loan.

Before applying

Before you apply for a loan, take about an hour to sit down and review your finances. Figure out how much financing you can afford and how much you really need. There are many loan calculators online that can help you get an estimate of a monthly payment based on the loan amount you need and the interest rate.

Gather all the documents you will need for the loan (including bank statements, tax slips, recent pay stubs, any documentation relating to a freelance writer’s income, and documents detailing investments and assets). Keep these forms handy as you may need to provide them multiple times, depending on the type of loan.

After your lender approves your loan, make sure you know when your first payment is due. Some lenders will allow you to choose a day of the month to make your payment when you complete the paperwork. Keep your loan documents in a safe place so that you can access them later if you have any questions or concerns about the loan.

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