How to Borrow – Avoid These Loan Mistakes


Applying for online loans isn’t difficult when you follow the necessary steps and know the mistakes to avoid. Both personal loans and installment loans are not that different when it comes to the application process, and a little insight can go a long way when borrowing. 

Many loan requests are related to unexpected expenses, debt consolidation and other reasons, with many of them being urgent requests. Knowing how to properly complete an application and what you should not do will help with any decisioning or speed of processing. 

Your eligibility for a loan depends on your application, and often your credit score. Being able to properly complete a loan application has everything to do with a lender looking at whether they might allow you to borrow.

Not meeting the minimum requirements

Depending on the lender, the requirements may vary. Common requirements include being of legal age and a Canadian resident, along with a regular income and active bank account. Some lenders may have a minimum income or credit score requirement. This can also include not exceeding a certain debt to income ratio. 

RELATED: What is a Good Debt to Income Ratio 

Not reading the terms of the agreement 

When applying with a loan, you will be presented with the loan terms when approved. This outlines the interest rate, APR, along with any additional fees that might be involved. As with any agreement, you should read the terms before signing. 

Only looking at interest rates but not APR

When looking for a loan you should check the annual percentage rate (APR) in addition to the interest rates charged. The APR provides a better idea of the cost of borrowing, which may include any other fees, and you would likely find if you read the loan terms agreement.

Not looking at your credit score before applying 

When applying for personal loans most lenders will have minimum credit score requirements. But if you’re applying for an installment loan, some lenders might use alternative data when reviewing your application to help them make a decision. Knowing your credit score before applying for loans can help with finding the right lending options that might suit you.

RELATED: What Credit Score is Needed for an Online Loan 

Overlooking fees (and penalties)

When looking at loan options, it’s important to consider more than the interest rate or APR. Reading the website will often provide what you need, but don’t skip reading the  terms of the loan agreement. You might find info in the terms such as prepayment penalties that would affect your ability to pay off your loan if you chose to sooner.

Not filling out the application properly 

A surprising number of loan applications can be rejected for things like typos or incorrect info provided. Many are incomplete in details, and some are falsified with the info provided. Taking the time to properly fill out an application accurately is your best chance of being approved. One common mistake some make is not providing your full or legal name. How it appears on your bank account is usually advised. When lenders can’t verify your details, your odds of approval decrease. Lenders not using credit scores will often use instant bank verification (IBV) for identity validation, along with reviewing income and debt details. 

Lying About Your Income

People that lie about their income or other details on a loan application are on a fast track to their request being denied. Lenders look closely at the details submitted as this is how they manage the risk side of lending. Lying about your income when applying for a loan usually results in being your loan request being rejected. 

Borrowing more than you need 

The larger the amount requested, the larger the monthly payments will be. Requesting larger amounts can make it more difficult to get approved. A lender will look at current financial commitments, debt and monthly expenses to determine what you can afford to borrow. The incoming versus outgoing funds, or debt to income ratio, will often influence decisions. 

Not assessing your repayment ability 

This would usually depend on details like what you earn, what your debt payments are, and what your expenses look like. A prime concern of lenders is your ability to repay. While many will consider a certain amount of risk acceptable, they want to avoid someone defaulting on a loan. 

Overpaying for a loan

Finding a loan with a suitable APR that you qualify for is a start. But watch for extra fees within a loan agreement. Also avoid accepting repayment terms for a longer period if possible. This might lower your monthly payment, but it also means you’ll pay more interest. 

Assuming banks are the best option

Some automatically assume that banks are your best bet when borrowing. But nowadays, many reputable online lenders can do better. With less overhead like branches, online lenders are often able to provide comparable and better rates than the banks tend to offer and should be explored as an option when borrowing. Banks are also more difficult to qualify for when applying for a personal loan.

Over focused on monthly payment

Some people are mainly concerned with their monthly payment. Their equated monthly installment (EMI) is a fixed payment amount based on the principal plus interest that would be agreed to between the borrower and the lender. But if you are only looking at the monthly payment, you might miss how the terms could include extra or hidden fees, or how much you might pay in interest. Especially if you take a longer term to lower the monthly payment.

Not managing your DTI

Before applying for a loan you should look at your debt to income ratio, or DTI, to see things from a lender’s perspective. If your DTI is too high, lenders will consider your application too much of a risk and are more likely to deny your request. To calculate your DTI, add your monthly debt payments and divide by your monthly gross income. Then multiply this number by 100 to determine the percentage. Depending on the lender, it’s usually preferred this number is below 30-40%.

RELATED: When Your Personal Loan is Denied (and what to do next)

Allowing loan myths to affect you

There are a number of misconceptions about loans, credit score and personal finance that many tend to believe which can affect your chances of being approved.  Educating yourself so that you don’t fall for such myths may help with your odds of approval.

Switching jobs before applying 

If you were to change employment right before applying for a personal or installment loan, it can affect your application being approved. Many lenders prefer to see a minimum of 3 months with an employer to consider an applicant to have a stable income.

Switching banks before applying 

If you change banks before applying for a loan, this can also affect your chances of being approved because the lender would not see a steady history to review. Many lenders for installment loans prefer to see a minimum of 3 months in bank activity. For personal loans the lender might be looking for closer to at least 6 months in bank activity. 

Providing wrong bank account 

If you applied for an online loan and provided the wrong bank account, the lender would not see your employment income and other details, which is likely to cause your application to be rejected. Ensure that you submit the proper details during the application process, including the correct bank account. 

Applying for multiple loans at the same time 

Some will apply for multiple loans at the same time, especially if they have a poor credit score and are looking for quick cash to get through a financial emergency or similar. This is more likely related to higher interest installment loans, and when a borrower owes on multiple loans and the lender sees this with IBV it can affect the decision of being approved. While you can have 2 or even 3 loans at the same time, the lender looks at it from a ‘what you can afford’ perspective. 

Applying for too much credit

If you made a large purchase using a credit card that hasn’t been paid off just yet, this can affect your ability to be approved for a personal loan if it drives up your debt to income ratio. Also, if you have applied for multiple loans or credit cards, these can create hard inquiries for your credit report, which can cause your score to drop and also affect your loan approval. 

Appearing credit hungry

If you apply for too many loans and too frequently, this can make you look ‘credit hungry’ to many lenders. This can either result in your future applications being denied more often or the interest rates steadily increase. In many cases, it can be both of these.

Making assumptions

If you believe that being preapproved means you have gotten the loan, you might be in for a surprise. Being preapproved only means you have met the basic requirements. Another phrase you might come across is guaranteed approval which can be misleading as there is no such thing. The main lesson here is to not spend money you don’t have. 

Not budgeting for your loan

If you haven’t properly budgeted for a loan, it can lead to trouble. Getting approved is the first challenge, but paying it back is a close second. You should determine what you can afford to borrow and how that might fit with monthly expenditures overall. When your finances are too tight and you have trouble making payments, it can lead to a whole new set of problems like missing payments.

Missing payments

When you borrow, your terms will include scheduled dates for repayment. Missing these payments can impact your credit score, and even your ability to borrow in the future. Your repayment history is a crucial part of your score and missing payments should be avoided at all costs.

When it comes to borrowing, you might be wondering what the biggest mistake of all might be. Without doubt, that would be when you accept a personal loan or installment loan when you know that you will never be able to repay it. For some, this can appear to be the answer to a current emergency, but it will likely impact your credit report for years and possibly make it impossible to borrow unless you chose high risk loans with high interest and similar.

When you follow the requirements and necessary steps, you can improve your odds for loan approval. Using smart borrowing habits during the process should also help. 

You might also look at a loan calculator to look at estimated monthly payments so you can see what you can afford and might work with your own budget.

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