Applying for a personal loan can come with its own set of pitfalls, but it can also offer the applicant a lot of benefits if carried out in the right way. Nowadays, people are a little savvier when it comes to applying for a loan, and will do some research before committing to a loan.
However, if you're new to personal loans, or haven't applied for one in some time, it can be useful to consider some dos and don'ts when making an application.
Work How Much You Actually Need to Borrow
While it can be tempting to try and apply for more than we need, we are effectively creating our own financial hardship. When making an application for a loan, it makes more sense to only borrow what we need, as this will reduce the interest we pay, and ensure the loan is paid off sooner rather than later.
Work Out Your Budget Beforehand
It can be easy to assume that we will have enough for loan repayments each month, but many are surprised when the amount differs to their estimate. When taking out a loan, you will also have to pay interest. Depending on much the APR is on your particular loan, your loan repayments are likely to differ to that of other people, so never assume. You can use a simple spreadsheet or tools such as Money Dashboard.
While the interest rate you've been given may be impressive, it doesn't mean that there isn't a better one available. Using a comparison tool can furnish you with many different lenders, each with their own APR. This can mean that you're paying much less in interest, which makes for lower monthly payments.
Make The Repayments on Time
Missing the odd payment here and there may not seem like a big thing, but it can raise flags with the lender. The ability to repay the loan not only helps keep your credit report clean, but also builds a profile with the lender. While the lender may still offer you a loan following the missed payments, it's likely that the interest will be higher.
Of course, things can happen that's out of our control, so in this regard, it can be a good idea to contact the lender to discuss your current predicament.
Review The Terms of the Loan
Applying for a loan can be a time-consuming endeavour, and many of us are keen to sign on the dotted line. Signing a loan agreement without reading the terms is agreeing to a slew of terms and conditions, which you would not have had sight of. This means that if any discrepancies do arise, it can be more difficult to fight your case, because the discrepancy in question could be due to you not understanding how the loan works. With this in mind, reading the loan agreement for a personal loan is worth ten minutes of anyone's time.
Rush The Application
Nobody likes filling out application forms, but there really is no benefit in rushing to complete it. Rushing through an application means that you may give incorrect information, and completely misunderstand aspects of the loan. It could even mean that your loan is rejected in some instances due to the information that was given.
Assume Payment Protection Insurance Is For You
Due to the controversy surrounding PPI, many people associate it with some sort of scam. The insurance itself is completely legitimate, it was the way that it was sold that caused issue, and why so many people were due for a refund.
Adding payment protection insurance to your loan may seem like a good idea, and some feel it will even help sway the decision as to whether a lender offers you a loan or not.
The fact is, if you're eligible for a loan , there's no reason you won't be offered it, regardless of whether you choose insurance or not. If PPI is something you're interested in investing, it should be a completely separate discussion altogether. There's very little point in taking out insurance if it doesn't commence until some months later following the change in your circumstances. Just like a personal loan, an applicant should be fully aware of what they're signing for when it comes to PPI.
Rely on Borrowing
Taking out a loan to reduce debt or buy a new vehicle is much different to taking out a loan because you can. If you're having difficulty with day-to-day expenses, then a personal loan isn't the answer. You would be best looking at your current financial situation and look as to what changes can be made to ensure that you don't have to resort to borrowing to make ends meet.
What's more, if you rely on finance again and again, you are effectively taking on more debt because of the interest you will be paying.
Taking a loan for the right reasons can do a lot to get your financial affairs in order. However, if you skip over the small print and just sign the dotted line, you could be subjected to some financial difficulty later on.
Have a look at our personal loan checklist to help you prepare all the required information before applying for a loan.