Stop Doing This While Taking a Loan: Top 5 Mistakes that Will Ruin Your Budget
Taking loans is difficult.
We often forget about that while borrowing cash for some needs. It seems an easy matter – apply, cut the deal, get your funds. When you need money fast, it’s easy to make drastic mistakes. The problem is, the cost of such behavior is too high: sometimes, the wrong decision influences your budget for several years straight.
Prevent yourself from this burden by maintaining simple rules. See what errors people most often make while taking credits, and find out ways to avoid them.
Check Yourself: What Errors you Make While Applying for a Personal Loan
#1 Agreeing to the Easiest Variant
In a hurry, we often settle for the fastest option. When we survive an emergency or need money as soon as possible for various reasons, there’s a big risk of cutting an unfavorable deal.
Unfortunately, many lenders use this trick to earn more on inexperienced clients. They offer us quick credits with immediate approval and promise money to come in one day. Such options are a perfect solution, except for one thing – you’d probably pay a lot more for interest. As compensation for fast response, these companies ask for unfair rates.
Keep in mind! Researches show the interest rate for personal loans varies from 10% to 28% in 2021. In Spring 2020, the average number was 9,6%. The number depends on your rate. Borrowers with an excellent score can ask even for better conditions.
With the common idea of normal interest, you can make a sober assessment of suggested conditions. Don’t settle for worse deals even in a hurry.
#2 Spending and Borrowing During the Approval Process
Even after pre-approval, your application may be rejected. It happens if your behavior is far from reliable. Some borrowers don’t realize the responsibility they bear while taking the credit. Before giving you approval, the lender thoroughly checks either your history and present behavior. If you continue buying unnecessary items and take cash from your card, don’t expect creditors to trust you.
Chris Bounds from Invested Agents company advises all applicant to cut off spending:
“Start by minimizing unnecessary expenses to pay off bad debt such as credit cards and saving money for a down payment. The trick is to shift your mindset away from spending and focus on the years of pride and joy you will have…”
Do not take any credits and try to spend less at least during the inquiry.
#3 Applying for Too Many Loans at Once
Each time sending the application you pass the inquiry – a request your lender sends to the credit agency. During this process, the institution examines your history to forecast your opportunities and credibility. The lender gets the access to all of your transactions, present debts, and loans you apply to at the same time.
FICO, the most common credit agency in the US, uses several factors to define your score. While the main one is the history of payments, the next 30% are reserved for the amount of money out already owe. Borrowing too much, you prevent yourself from profitable conditions.
As an indicator of financial difficulties, the inquiry lowers your credit score for a short period. Passing too many examinations at once, you can significantly damage it.
In addition, lenders can see all of your applications and consider such borrowers as unreliable person, who need a lot of money and won’t be able to return all this on time.
#4 Forgetting About Additional Charges
Borrowing cash, we try to value its true cost. For this, most people use loan calculators – enter the amount of money, rate of interest, and the term of repayment, and get an approximate result.
Indeed, it’s a good way to predict the rates. But this method doesn’t consider another source of charges – additional costs.
The procedure may be taxed for various reasons, creating a decent sum in total. Fees and penalties usually include:
- Early repayment fee – in most cases, you must pay this fine if you decided to repay the debt earlier. This way the lender compensates losses from monthly interest.
- Annual fees are paid each year as payment for your account;
- Transfer fees – tax for transferring money from one account to another. You pay for it both receiving the funds and sending the part of debt each month;
- Origination fees – a sum paid for third-party services that process and confirm your application.
The true value of the loan may be much higher than you expected. Big trouble is that not every lender warns the borrower about these issues. Such things are written in the agreement in the fine print, so inexperienced customers often neglect them.
Remember that the total value consists of all these little things and can differ from the original sum.
#5 Not Counting Your Opportunities
We often take too much credit without the exact strategy. As a result, most borrowers run into the debt cycle – the prolongation of present debts makes the interest rate even higher. As a consequence, the debt rises as a snowball.
To avoid such a situation, count how much you can pay each month, and what are your real opportunities. Even in case of emergency, impulsive decisions aren’t the best idea. Such behavior ruins your budget and makes the situation worse each time you miss the payment.
Consumer Financial Protection Bureau analyzed the market of lending and discovered that 1 in 4 payday loans are reborrowed at least 9 times. With such an approach, a small sum can turn to be a large debt which ruins your budget on a daily basis.
Loans aren’t a simple solution for your troubles – this sphere hides many pitfalls and requires responsibility. If you need some financial support at the moment, learn all of your opportunities and remember these mistakes to prevent yourself from unfavorable deals.