Applying for a loan? Avoid these costly mistakes. (iStock)
If you’re in the process of applying for a loan, you might consider closing other credit card accounts or ignoring your credit score, but that would be a mistake. While technology has made it much easier to apply for loans, there are still a few common errors that many borrowers make that could result in losing a loan, even after you've been pre-qualified.
Following these tips can improve your chances of loan approval.
Once you know you’ll apply for a loan, stop spending. Putting your credit cards away is particularly important if you are applying for a mortgage loan. Your lender can reject your loan application even after you’ve received pre-approval. While it may be tempting to go shopping for furniture, wait until the keys are in your hand before you charge anything.
Don’t apply for multiple lines of credit in a short time
Before applying for any loan, shop around. Call and ask about interest rate ranges and any fees associated with the loan. Seeking too many lines of credit in a short amount of time can be a red flag to lenders. Keep in mind that when you apply for a home loan or car loan, the broker or car company may run your credit with multiple lenders. Too many credit inquiries in one year can hurt your credit score. Still, most scoring calculations factor in repetitive mortgage and auto loan inquiries, so your score won’t get dinged quite as much as if you’d applied for multiple credit cards.
Don’t close old credit lines
You might think that closing old accounts would look better to creditors, but this isn’t true. If you plan to take out a loan or other line of credit, avoid closing old accounts for at least six months beforehand. Closing old accounts will reduce your debt-to-income ratio and could make it harder for you to qualify for the financing you need.
Don’t deposit a lot of money into your account without a record of where it came from
Keeping a record of all income is especially important if you are applying for a mortgage or other large loan. If you can tell the lender where it came from (a gift from your parents or grandparents or income from a side-gig), the funds can help you qualify for a higher loan. If you can’t show where the money came from, you could be at risk of not qualifying for a loan. Lenders want to make sure you have enough funds to cover any loan they give you.
Do check your credit score
You can save time and frustration by checking your credit score before applying for a loan. Checking in advance allows you to fix any errors or clean up late payments or legal judgments, so you have a better chance of getting a lower interest rate on any loan you get. You may have to pay to see your credit score, but some credit card companies offer it as a perk for using their services. Check to see if you have free access to your score. Otherwise, you can check out any of the three major credit reporting bureaus to purchase your credit score.
Do watch out for penalties and fees
Ask your lenders about any fees they charge, including loan origination fees, filing fees, and early repayment penalties in addition to the interest rate. The extra costs will affect the total cost of the loan.
Before You Apply
Before you apply for a loan, take an hour or so to sit down and review your finances. Determine how much financing you can afford and how much you really need. There are many loan calculators online that can help you get an estimate for a monthly payment based on the loan amount you need and the interest rate.
Gather any paperwork you’ll need for the loan (including bank statements, tax statements, recent pay stubs, any documentation for freelance income, and documents detailing investments and assets). Keep these forms handy as you may need to supply them multiple times, depending on the type of loan.
Once your lender approves your loan, make sure you know when your first payment is due. Some lenders will allow you to choose a day of the month to make your payment when filling out the paperwork. Keep your loan documentation in a safe place so you can access it later if you have any questions or concerns about the loan.