Personal loans are frequently used by borrowers during financial emergencies. They are popular thanks to the simple application process, prompt payment and the lack of collateral requirements.
Borrowers are often carried away by the deceptive simplicity of a personal loan and often miss out some crucial factors for loan approval. So before applying for a personal loan, it's important to look at the common errors that many borrowers make and learn from them.
Applying for multiple loans
You might consider applying for a personal loan from a bank or online lender like creditninja.com when you have a financial need. However, before doing this, remember that you can harm your credit score if you make too many credit applications in a single year. Lenders may presume you're credit-hungry and will be hesitant to lend you funds.
When you request a personal loan, the lender sends a credit inquiry to a credit reference agency to assess your creditworthiness. Crediva, TransUnion, Equifax, and Experian are the four credit reference agencies you can contact in the UK. Hard inquiries are lender-initiated direct inquiries and agencies can lower your credit score for each inquiry they receive about you.
Disregarding your credit score
Check your credit score before submitting a personal loan application. This will allow you to correct any inaccuracies, as well as clear up late payments or legal judgments. This will improve your chances of getting a lower interest rate on any loan you take out.
When lenders assess your personal loan application, one of the most critical variables they consider is your credit score. The higher your credit score the lower your interest rate will be. For the record, 39% of British adults have missed more than one credit payment, negatively impacting their credit score.
That said, there are specific lenders that still consider borrowers with a poor credit rating. Each lending institution has different credit criteria, so do your homework before applying.
Your credit score shows how responsibly you've used credit in the past. Banks and other financial organisations tend to consider a credit score over 750 as acceptable. Lenders often reject credit scores below this margin.
Not shopping around for prospective lenders
Shopping around for lenders can result in a lower interest rate and a lower repayment amount over the loan period. Many borrowers are hooked by instant approval loans. However, this type of loan may have a higher interest rate than other lenders.
A low interest rate isn't the only reason to shop around. If you look closely at the terms, you'll notice differences in lender origination charges, fees, and third-party expenses if you compare lenders.
Assess the processing charges and prepayment costs. Customer service and reputation are also both important. If you want a good experience, do your homework before submitting your application.
Failing to assess your repayment capacity
Income, length of employment, and the borrower's current debt amounts are all factors that influence your repayment capacity. The term Debt to Income (DTI) ratio refers to the proportions of your monthly payments to your gross monthly income. It is a criterion used by banks and financial institutions to assess an individual's repayment capacity. They'll sum up all of your monthly loan payments, as well as certain other financial responsibilities like child support.
If you reach a usage rate of 50% or higher, lenders might regard you as overextended, harming your credit score. It could also have an impact on future loan applications. However, regardless of your credit restrictions, your total debt repayments should not exceed 36% of your gross income.
Not reviewing your credit report
Examining your credit history and ratings will help you have a better understanding of your current financial situation. In addition, checking your credit reports on a regular basis will alert you to the information lenders may receive. Doing this could also help you spot out-of-date, incorrect, or missing any information.
Report any inaccuracies to the credit agency and lender as soon as possible so that they can be corrected right away.
Falsifying financial information
If a borrower is detected lying on a loan application before it's approved, the lender can reject the application completely. By faking financial information, you're committing a crime known as loan application fraud.
Avoid exaggerating your earnings in the hopes of receiving a good deal. Loan application fraud is a serious offence that comes with severe consequences. If you're found guilty of the offence, you could face prosecution and worse of all, imprisonment.
The bottom line
Even though online lending companies make it easier for applicants to apply for personal loans, there are still a few mistakes that many borrowers make. These errors often lead to their loan request being denied. Avoiding these common errors is possible through proper research and pre-assessment of the eligibility requirements.
Copyright 2021. Featured post made possible by Sally Trase of Start Grid/Searchtides for CreditNinja.