Loans are one of those things that most of us know very little about. After all, knowledge comes with experience, and how many times do you find yourself applying for a loan? Not only does a lack of experience let many of us down, but it’s also an industry that most of us tend to stay away from until that moment we go searching for a loan. As a result, we don’t really know what we’re doing and often make costly mistakes.
To help you get over this hurdle, we’re going to point out some of the most common mistakes that people make when applying for a loan. At Elite Personal Finance we have encountered a glut of horror stories from customers who made mistakes and wished they had done things differently. We have seen things from both sides and as a result, we know how costly these mistakes can be. So, pay attention, because it could benefit you more than you think:
Check Your Credit Score
You need a good credit score before you can get a loan, and the better your credit score is, the better the loan will be. So, before you start your search, make sure you check your credit score and get an idea of where it is and, if it is low, of what you need to do to improve it. It’s not always difficult to improve your credit score, so rather than settling for a bad loan, take some time to fix your score and then you’ll get a better deal on your loan. It’s as simple as that.
Take out smaller loans. Pay off credit cards and debts. Do what you can to fix that score, because it could equate to a massive difference in the sort of loan you are offered. Of course, if your credit score is fantastic and can’t be improved any further, then you are good to go. In these cases, you should remember that your credit score is your bargaining chip and allows you to laugh in the face (hypothetically, of course) of any bank manager that offers you a loan with a high APR.
First Come; First Served
Let’s say that you need a new smartphone and you’re going to pay monthly for it. It’s something that will mean a lot and something that will consume a lot of your expendable income every month, so you make sure that you shop around. You spend time looking at the type of phone that you want and at the best places to purchase it.
This is something that we all do, and something that makes sense.
But when it comes to loans, the majority of people simply go with the first one they see. In fact, the loan of choice for many is the one offered by their bank. They phone up, make an inquiry and within a matter of minutes they have a loan. This may be the easy option, but as with the smartphone, this is something that will eat into your monthly earnings and something that will have a big impact on your life, so you need to shop around.
By all means give your bank a ring. If you have a current account and/or a credit card with them, then they may be more inclined to give you a good deal, and you will certainly be more inclined to trust them. But do not assume that the deal they offer is the best one available. Do your research. Check in with local banks and try to negotiate with the bank manager. Check out comparison websites. See what’s out there and make sure you find a loan that is perfect for you in regards to cost and terms.
There are many different loans out there and it is as important to focus on these as it is to focus on the price. For instance, if you’re buying a car, then one option may seem higher than another, but that option may also cover you if anything happens to that car. Don’t just assume that the cheapest loan is the best loan, because that’s not always the case.
Don’t Get Desperate
So, what if you have a bad credit score and what if you can’t find a decent loan no matter how hard you try? In this position, many people resort to loan companies and loan sharks that charge a ridiculously high APR. This might get you the loan that you want, but at what cost? Don’t focus on the now and instead think about the future, asking yourself some questions before you progress.
Do you seriously think that you can pay off those installments?
Are you really that desperate?
Is this loan worth all of the trouble that it will inevitably bring?
Take some time out, let the anger and the frustration subside, consult a wise and level-headed friend. Do whatever it takes to give yourself time and room to think and do not jump into making any rash decisions that you will be paying for further down the line.
Tell the Truth
There is nothing wrong with a white lie, unless you’re applying for a loan. A little dishonesty can go a very long way here. That’s because if you lie, they will find out and then they will know they are dealing with a dishonest customer. As a result, you might find that your rate has just increased or even that they no longer want to offer you a loan.
It doesn’t matter if your credit score is bad or if you have had a bad experience and don’t want them to know. They will find out, because they make it their business to know these things. Trust us on this one, if you know, then they will know, and no amount of lying can save you.
Look at the Whole Picture
One of the most common issues we see is from people who pay attention to the monthly payback and to nothing else. “I only need to payback $x every month,” they think, “that’s not too bad”. But that’s because it’s designed to look good, it’s designed to look almost infinitesimal, so that you don’t pay attention to the bigger picture.
A loan company will focus more on those monthly repayments than on the total figure that you need to payback. They might tell you the percentage rate and the length of the loan, but they know that you probably won’t be doing the sums because they know you will be focusing on that single number and nothing else.
So, make sure you look at the whole picture. Make sure you know what the total amount is and make sure it justifies the loan amount. You should also check the small print for any additional costs, because these exist in most loans. There could be fees for taking out the loan, fees for settling it early, late and even on time. They are counting on the fact that you won’t read the small print and you won’t challenge them on small additional payments. But if you do and if they think they could lose you as a customer, then they may waive them for you.
Don’t Push It
Elite Personal Finance recently had an email from a distressed woman relating a traumatic experience. She wanted a car loan for $5,000. She had no experience with loans, but she had fantastic credit. She did her research and was offered a good loan, but during the conversation she learned that she could pay an even smaller percentage if she got a bigger loan. In the end, after convincing herself that she could also use a holiday and a new kitchen, she took out a loan for $30,000.
12 months in, she had spent every penny and was struggling with the repayments, so much so that she was contemplating taking out another loan to cover them.
The key message here is that you should not over-extend yourself. Yes you will get a better percentage rate if you take out a bigger loan, but that doesn’t mean you should. It is very easy to get into a lot of trouble this way, so you need to establish an amount that you need and then stick to it. Go for less or for ever-so-slightly more if you can get a better deal, but don’t get greedy, because you will pay for it in the long run.
Far too many customers quickly sign the paperwork, get the loan and then go on their way. As a result, they later discover things that they didn’t know before, things that may have stopped them from getting the loan in the first place if they knew. To make sure this doesn’t happen, you need to be inquisitive, you need to bug the loan company with as many questions as you have.
Don’t worry about wasting their time or annoying them, it’s their job to listen to you and answer you and it benefits you to do so. If you are not sure about something, ask them; if you want them to clarify something in the small print, ask them. You can even ask them to read the small print to you, because if they are desperate enough to give you a loan, which they almost certainly will be, then they will be more than happy to do this.