Most Common Loan Application Mistakes
At some point in our lives, most of us will apply for a loan of some type, whether it be a personal loan, or a mortgage or a start-up loan for a new business. While technology has significantly improved our ability to evaluate the offerings available to us and apply, there are still mistakes that can be made in the process that can be financially detrimental. Loans normally are taken out for large purchases such as a house, car or other such investment or expense. Therefore, it is important to be even more diligent when making such a big-ticket purchase to avoid unwanted consequences at a later stage.
When discussing common loan application mistakes, some points are similar between applying for a personal loan and applying for a business loan. Therefore, this article starts out by discussing the mistakes that people make when obtaining personal loans before moving on to the more specific business loan mistakes.
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Common Loan Errors and Omissions
1)Not Filling Out All Details
When a lender (i.e. a bank or other such financial institution) provides you with a loan application, it is in your best interests to be as truthful as possible and fill out every detail, even if it may not be mandatory. Failure to do so can often result in one of two things. If the missing information was important and you later cannot pay back the loan, the lender can sue you for misrepresenting or hiding facts. On the other hand, sometimes, you may increase your chances of securing the loan and/or obtain a better rate or enhanced terms on the loan if you add in other considerations that help the lender arrive at their final decision.
2)Not Reading Minimum Requirements
Most lenders will have marketing materials that inform the prospective borrower of the minimum requirements needed to obtain a specific type of loan. If you cannot find these materials, ask an employee or other such representative to direct you to this list. It is a waste of time, energy and money for both the lender and the borrower if a borrower applies for a loan without being fully eligible for it. Moreover, there is also a financial incentive to avoid this. When lenders conduct a hard credit check, it impacts the credit score of the borrower slightly. It is thus in the borrower's best interests to not have to suffer this impact on their score without cause.
3)Using False or Incorrect Information
To make an accurate lending decision, lenders need to know the facts as they are. Falsifying data is already a punishable offence as aforementioned. However, in some cases, borrowers do not use the most optimal information either. For example, borrowers are required to provide a bank account number as part of the initial process. Some borrowers who have multiple accounts may use their non-primary account for this requirement to keep their loan and earning activities separate. This is not advisable though. The account information is used to confirm income and frequency of payment as well. Thus, if a secondary account is used, a lender may conclude that the borrower does not have a steady source of income and reject the loan in its entirety.
4)Jumping the gun
When pursuing a loan such as a mortgage, it is always better to know the amount that you are pre-approved for. This ensures that when bidding on an asset such as a house, you know your upper limit, and can bow out of the auction process if that limit is breached. Unfortunately, some buyers do the opposite and bid on the house without being pre-approved. When this happens, they run a serious risk of committing themselves to a purchase without being fully funded, which leaves them to put up additional equity at initiation to cover the cost of the house.
5)Asking for too much
When applying for a loan, it is always better to err on the safe side and ask for a little less than what you actually need. Lenders make a decision on how much to lend to a borrower and at what rate based on metrics such as their income, wealth, and assets. Thus, when a borrower asks for an amount outside of what their financial profile would generally dictate they can pay back easily, a lender might assume that the borrower is high-risk and not approve the loan. If it was approved though, the loan could also be priced on the expensive side to compensate for the additional assumed risk.
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Business Loan Mistakes
Applying for small business loans has many parallels to personal loans, but also a few major differences. Below are some of the pitfalls to avoid when looking to secure a loan to start or grow a business.
1)Not Understanding Credit Scores
Just like consumers, businesses also have credit scores that are available from one of three major credit bureaus. Before applying for a loan, it is important to order a credit report from one of these bureaus and study it thoroughly to evaluate where you could be questioned and if any particular circumstances need to be explained.
2)Not Posting Collateral or Equity
Having some form of asset back-up for the loan provides lenders with comfort that they would be repaid if there was a failure on the part of the business to pay back the loan. Similarly, initial equity works like a down-payment for a mortgage to help in securing a business loan. A failure to do either exposes the lender to significant downside risk, which would reduce the chances of the loan being approved.
3)Not Having a Business Plan or Financials
When applying for a loan, a business plan complete with the use of proceeds and updated financial statements should be furnished. Without a solid rationale underpinning your reason for acquiring a loan or the requisite financial history to show trends in revenues and cash flows, a lender would be hesitant to extend a loan based on the greater uncertainty.
