5 Common Personal Loan Application Errors

Before turning in a personal loan application, make sure you know exactly what you are getting into. Personal loans tend to have the highest interest rates of any installment loans on the market. They are also very high risk for the borrower due to the high consequence of default, and you need to protect yourself during the application process to mitigate some of this risk.

#1 Not Budgeting First

Before you apply for a loan, you should consider what you can afford to pay each month instead of only thinking about how much you need. Start by calculating your monthly income. Divide this sum in half. Next, subtract fixed payments such as rent, mortgage, car payments, student debt or credit card debt. The remaining sum is the amount you can contribute to a new loan. Some people will be surprised to find they are already over their budget. In this case, taking another loan can quickly lead to default.

#2 Lacking Professionalism

Once you know your budget and the total sum you need, you will begin approaching lenders for quotes and applications. You should treat this process just like applying for a job. Only go to the lender well-dressed and well-groomed. Speak carefully, and fill out all documents with caution. Like it or not, you are being judged on each aspect you present to the lender, including those aspects that are not on the application itself.

#3 Opting for High Risk Options

Personal loans are high risk by nature. However, using your home as collateral, electing a sub-prime loan or putting your entire savings into a down payment greatly increases the risk of the loan. Instead of making the loan higher risk through these options, look for ways to make your loan lower risk. This can include locking in a fixed rate or opting for an unsecured loan.

#4 Ignoring Fine Print

When you apply for a loan, you may think you can walk away without penalty. This is true with most respectable lenders. Unfortunately, some lenders target low-credit or low-income borrowers looking for personal loans by building in penalties for not signing a loan contract. Others will preclude you from applying for additional loans while your loan is being processed. Read your entire application before you sign it to make sure it is not actually a contract with the lender. You will be surprised to find some large problems in the small print.

#5 Taking the First Offer

Once a lender agrees to fund your loan, you do not need to take the first offer. In fact, most lenders expect you to negotiate. Instead of simply signing the document, come with questions in mind. You should also know the bottom line goal you are looking for. For example, some borrowers will be most concerned with a manageable monthly payment; others will need high limits. You can use the other terms of the loan to negotiate to make sure you have a loan that meets your top financing priorities. Do not simply take the first offer the lender makes.

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