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The Steps You Have to Follow to Apply for a Loan

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Applying for a loan, whether it is a mortgage to buy a home or a personal loan to buy a car, is a fairly straightforward process, though if you have never applied for a loan before it is important that you get off on the right foot because if you don’t, you could find that your efforts to secure a loan have been in vain.

Understand How Much You Can Afford to Borrow

Before you contact any banks or lenders, use online loan or mortgage calculators to work out how much you can comfortably afford to borrow and repay. As many people have come to realise, the time might not yet be right to apply for a loan and if that is the case, it would certainly prove advantageous to realise this before you start preparing for a loan application rather than after you have already got started.

In addition to using online loan calculators, prepare a budget that helps you to understand your spending habits and your outgoing expenditure, and don’t forget to work out how much payment protection insurance will set you back if you have to take out a policy.

This would also be a good time to have a look at some banks and lenders’ websites to make sure that you qualify for a loan. The criteria that banks and lenders look for include age, citizenship, residency, income and credit score.

Where to Borrow

Some banks and lenders will prove better choices to borrow from, so provided you know the kind of loan you want to apply for, you now need to decide which bank or lender you want to apply to.

Working with a broker is an option to consider if you are looking at applying for a mortgage and many people have found it advantageous to work with a broker for one or more reasons when applying for a loan with which to buy property.

Generally speaking, banks are your best option when applying for large personal loans or mortgages, though also consider building societies as they usually offer competitive rates.

Know the Details

Not all banks and lenders are equal in that some will charge you what are known as ‘penalty fees’ for repaying a loan early whilst others won’t. As a rule, it is better to apply for loans on which you won’t be penalised for repaying early or making extra repayments, so this is something to look into when shopping around for a suitable loan.

Along with penalty fees for paying the loan off early, you should also take note of the other fees and charges banks and lenders apply, and it is always a good idea to make enquiries rather than trusting the information on the bank or lender’s website – sometimes the information on their websites is incomplete.

Know Your Credit Rating

Before you apply for a loan it is imperative that you know your credit score. Your credit score is based on your creditworthiness which is based on your credit files that are typically sourced from credit bureaus. Basically, the higher your credit score the less risk you present to the lender, so you want to have a high credit score and know exactly what it is, before applying for a loan.

So what goes into your credit score? There are actually a number of different formulas used to calculate credit scores with the most common factors on which they are based as follows:

– The length of your credit history, with the longer your history, the better for your score.

– The amount of money you have outstanding, with the more you owe, the lower your score becomes.

– Your payment history, with a record of late payments affecting your credit score negatively.

– Negative public records, for instance, a case of bankruptcy will also affect your credit score negatively.

– The number of loan or credit applications you make affects your credit score, so don’t apply for loans or credit unless you are reasonably sure of success.

– Opening too many new accounts could also affect your credit score for the worse, so don’t open any new bank accounts unless absolutely necessary.

To find out your credit score contact Equifax, Experian or CallCredit.

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Show a History of Saving

Contributing regularly to your savings is an excellent way to prove to the bank or lender you apply to that you are financially responsible and capable of budgeting. Applying for a loan is all about establishing trust and you need to show that you can be trusted to make regular repayments on your loan.

Setting up a regular saving plan around six months to a year before you apply for a loan is a wise move, especially if you plan to apply for a loan through your bank.

Prepare the Required Documentation

It is quite remarkable just how many loan applications are rejected simply because the applicant hadn’t prepared the required documentation. In some cases, applicants have been hit with a higher than expected interest rate because they were unable to provide the ‘financial picture’ expected of them, so make sure you know exactly what you need to bring on the day.

As mentioned earlier, applying for loans or credit can affect your credit score, and you don’t want to have your application rejected because you failed to bring the required documentation with you as this could impede your chances of success in the future.

Dress to Impress

First impressions are important – your credit score and financial history are naturally more important – and you want to make a good impression on the loan officer on the day. This isn’t to say that you need to buy new clothes or a new suit to impress the loan officer, just that you want to walk into the office and look like someone who’s worthy of lending to.

It really is amazing the difference that making a good, or poor impression, can have on your chances of successfully applying for a loan.   

About the author

Peter Davis Peter Davis is a Marketing Analyst at PaydayLoan123 specialising in financial products. Peter writes most of our articles as he stays up to date with the latest information. He enjoys most sports, particularly playing football and watching his favourite football team. Peter really like his food too as we have all witnessed first hand!

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