Personal Loans

8 Things You Must Not Overlook While Applying for Loan

November 20, 2023

Whether you're seeking a personal loan, a logbook loan, a mortgage, or any other type, applying for a loan can be daunting. A process you may want to get over with as quickly as possible. But hold your horses!

Applying for a loan is a significant financial decision and one you shouldn't hasten. When you rush the process, you might overlook certain vital aspects, which can lead to potential pitfalls’ including losing money.

Overlooking even the tiniest aspect can lead to disappointment and unnecessary setbacks. This article will shed light on the eight essential factors you need to consider when applying for a loan to ensure successful borrowing.

1. The Loan Type

The type of loan you choose can significantly impact your borrowing experience. Opting for a readily available loan without considering whether it aligns with your needs can lead to financial challenges.

Loans are designed for specific purposes, such as homeownership, debt consolidation, car buying, or business expansion. Choosing the right loan type ensures the funds are used as intended, and the terms align with the purpose of borrowing.

If you apply for a loan that does not suit your needs or qualifications, you may be denied, get unsuitable terms and conditions, strain your finances to make repayments, and increase your chances of default.

Before you apply for a loan, clearly define your borrowing needs and financial goals. Determine the purpose of the loan, the amount you need to borrow, and your desired repayment terms. Next, research different loan types available to meet your specific needs, compare them, and pick the one that aligns with your objectives.

2. Your Income

Your income is the cornerstone of your ability to repay a loan and an essential consideration for lenders.

You need to assess your income to determine whether you can qualify for a loan, secure better terms, such as lower interest rates, and comfortably repay the loan. If you borrow more than your income can service, you risk falling into debt traps, hurting your credit score, and defaulting.

People often overlook their income when borrowing for various reasons. Sometimes, borrowers are enticed by the allure of larger loan amounts, ignoring whether their income can support such debt. In other cases, financial emergencies and immediate needs can cloud judgment, leading individuals to borrow without understanding their repayment capacity.

When you evaluate your income, you can determine the loan amount you can comfortably manage without compromising your financial stability. This also helps you avoid borrowing more than you qualify for, which can lead to loan regrets and debt burdens.

It's equally crucial to consider your debt-to-income ratio as it may reduce your disposable income.

3. Your Debt-to-Income Ratio

Suppose you want to borrow, but you have existing debts. In that case, to determine your borrowing capacity, you need to look beyond your income and consider your Debt-to-Income Ratio (DTI). Your DTI ensures you borrow within your means, reducing the risk of overextending yourself.

Lenders use DTI to assess your ability to manage additional debt. It measures the proportion of your monthly income that goes toward debt payments. A lower DTI is often seen as more favorable because it indicates you have more disposable income to manage new loan payments.

If your DTI is too high, lenders may view you as a high-risk borrower and could decline your loan application. Even if approved, a high DTI could result in unfriendly terms such as high interest. Before you apply for a new loan, you should ensure the additional debt won't take your DTI above 35%.

When calculating your DTI, account for all debts, do not underestimate your monthly expenses, and do not rely on your inconsistent sources of income.

4. Your Budget

Your budget and borrowing are closely connected. Your budget outlines your income, expenses, and savings goals, and it serves as a financial blueprint. When you borrow, it's essential to align your loan with your budget to ensure you can comfortably manage the repayment without straining your finances.

When you borrow, part of your income may be redirected to servicing the loan. If you focus solely on getting approved for a loan without considering your budget, you might end up with a loan with a high monthly repayment that you can't fit into your budget. In turn, you might have to reduce your savings rate or cut expenses significantly by changing your lifestyle.

Ignoring your budget can also lead to late payments, missed payments, and even default.

Before you apply for a loan, calculate how much you can comfortably allocate to loan repayment each month. And when a lender makes you an offer, negotiate for a monthly repayment amount you can manage to prevent your budget from spiraling out of control.

5. Your Credit Score

Your credit score is like your financial report card, and it plays a pivotal role in your borrowing journey.

Lenders may use your credit score to assess your creditworthiness and the risk associated with lending to you. It reflects your financial history, including your past borrowing and payment behaviour. A higher credit score is often seen as more favourable, as it suggests responsible financial management and a lower lending risk.

A poor credit score can result in loan denials or approval with less favourable terms, such as higher borrowing costs or getting approved for less amount than you need.

Before you apply for a loan, consider obtaining your credit report from a credit reference bureau such as Metropool, CreditInfo, or TransUnion. Review your report for inaccuracies, unpaid debts, or negative marks. Ensure that your credit history is a true reflection of your finances, and if there are errors, get them fixed.

6. The Cost of the Loan (Interest Rate and Other Loan Fees)

Loan costs encompass not only the interest rate but also various fees like origination fees, application fees, and potential prepayment penalties. These expenses can significantly impact the overall affordability of the loan.

Borrowers who focus solely on the loan amount and interest without considering other fees can end up with loans that are much costlier than they anticipated. Overlooking these costs can also make you fall prey to predatory lenders who often hide them.

To better understand the cost of your loan, get offers from different lenders and compare them. Evaluate not only the interest rates but also any associated fees. You can use Money254’s free loan comparison tool to find affordable credit, estimate total loan costs, and compare over 150 verified lenders in Kenya.

7. The Loan Term

Your loan defines the length of time you have to repay the loan. It can impact the size of your monthly payments and the total cost of the loan. Choosing a loan term that doesn't align with your financial situation can lead to difficulties in making payments, increased interest costs, and, potentially, financial stress.

Before you borrow, you should also understand the trade-offs between short and long loan terms. Shorter loan terms may mean higher monthly payments but lower overall interest costs. In contrast, longer terms result in lower monthly payments, but you might pay more in interest over the long run.

Before applying for a loan, consider assessing your financial situation and ability to make monthly payments. Factors like your income, budget, and borrowing purpose will help you determine your ideal loan term.

8. The Terms and Conditions of The Loan

The terms and conditions of a loan are typically outlined in a credit agreement— a binding document that defines the rules of your borrowing arrangement.

The document lays out the specifics of your loan from the interest rate, fees, repayment schedule, and all other conditions that apply. Understanding these terms is vital to making an informed borrowing decision.

Neglecting to read or not comprehending the credit agreement can lead to unpleasant surprises, financial burdens, and even legal consequences. It's crucial to know what you're agreeing to before signing.

Despite the importance of a credit agreement, borrowers often rush through them. Sometimes, people may be hurrying to secure the funds, while others may assume that the lender's terms are non-negotiable.

Before signing, take the time to read and understand all the terms. Pay close attention to the interest rate, repayment schedule, fees, and any penalties for early repayment or missed payments. Ensure to ask questions and get clarifications on unclear terms.

If there are any clauses or conditions you're uncomfortable with, you may have some room to negotiate with the lender for more favourable terms before signing. You can also take the agreement home with you, sit with it, and ask a financial advisor to explain the jargon.

WRAPPING UP

The loan application process can be as simple or complicated as you make it. To ensure a smooth and successful experience, do your homework before applying. Take the time to evaluate your financial needs, research your options, and understand the terms and conditions offered by different lenders.

Remember that every detail matters at every stage of the loan application. As they say, the devil is often in the details. A seemingly minor oversight in your application could lead to delays, rejection, or less favourable loan terms.

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Farah Nurow is an experienced Content Writer who enjoys writing creative and educative articles meant to provoke readers' thoughts. He loves sunny weather and thick books. You can connect with him on LinkedIn.