Top 9 Mistakes to Avoid When Taking Up a Personal Loan for Business
If you are in business, you must have realized that your savings aren’t enough to get things running. You have also realized that banks from your bank or the credit union may not be approved easily. Therefore, you need to raise money through an alternative means; personal loans.
Compared to bank loans, personal loans are easily accessible, have fixed repayment rates, and cheaper than credit cards loans. Despite these benefits, most business owners still make mistakes. These mistakes either lead to a loan application being denied or one gets a very expensive loan.
To be on the same and money saving side, avoid the following mistakes:
- Overlooking origination fees
When getting a loan to consolidate your business debts, the lending institutions will charge you an origination fee. This fee is a requirement for your loan application to be processed. The origination fee is calculated as a percentage of the amount you borrow. This fee also varies depending on the lender you choose to get the loan from. However, in most cases, the origination fee is as low as 0.5%.
Since you aren’t required to pay the origination fee upfront, it can be rolled on to your loan. The bigger the loan the higher the interest rate as well as the origination fee. This also means that your loan will be expensive and if you overlook this fee, you will end up servicing an expensive loan.
- Not disclosing the purpose of the loan
If you have a business plan and explain to a lender explicitly the purpose of the personal loan, you will have better chances of getting your loan application approved.
- Having errors on your credit report
Your lender will look at your credit history before lending you money. Good credit scores attract fair and lower interest rates on loans. However, a poor history will attract high interest and transaction processing costs. Errors showing wrong and low credit scores result in expensive loans.
Incorrect reporting of payments on credit reports or having a closed account reported as an open account and other inaccuracies in your credit history result in decliningof loan applications. Look outfor errors in your credit report and settle any disputes with the credit bureau to avoid lower scores and high interest rates or total decline of loan applications.
- Having too much debt and lying about it
Yes, business isn’t doing well and your expansion of the business hasn’t paid off yet. You probably had to borrow to get your business where it is and since that will reflect on your credit history; you will have lower chances of getting the loan approved.
Approval of personal loans depends on your debt to income ratio. If your income is unable to cover the high debt, then you will not get the loan.
Letthe lender know your financial situation and if you are willing to be granted a loan as a high risk borrower, then you can approve the transaction. Money lenders dig into your history to determine your credit worthiness. Therefore, you shouldn’t lie.
- Not asking for information on how the interest rate is calculated
To get the best rates on personal loans, you should shop around. Unfortunately, when shopping around, most borrowers look through the interest rates and don’t ask for information on the basis of the calculations.
As you research and shop around for the best interest rates, be conscious and ask for information on how the lenders calculate their interest rates. Interest rates are either simple or compounded. The loan interest could also be pre-computed.
Simple interest rates are calculated based on the amount borrowed. Compound interest rates continue accruing on top of the existing interest as you make payments. You can shave off a few bucks if you make more payments on the principal amount.
Pre-computed interest rates have already been built into your monthly payment schedule. In this case, whenever you pay money at the due time, some of that money goes to reduce the principal and the other part goes to the interest.
- Not reading the fine print
The terms and conditions package is the fine print and has all the crucial details on how the loan will be repaid. Most lenders include clauses on penalties in the fine print and failure to read this means that you will have an expensive personal loan. If your lender includes a prepayment fee, it will be important to know about it beforehand so as to minimize the risk of paying everything in advance then finding that you owe the lender a big amount.
Reading the fine print also keeps you in the loop in terms of any hidden charges, transaction, or admin fees.
- Submitting many multiple loan applications
Every time you submit a personal loan application to a lender, they request for your credit history. Besides your credit score, the credit history information opens doors to information about your expenses and spending habits indirectly.
This is often determined when your report shows loan eligibility and approvals on loans close to each other. This depiction of high expenses or spending may put off a lender costing you the loan.
- Limiting your options to banks
As mentioned above, there are many alternative lenders, thanks to technology and the need for accessible and affordable funding options. To enjoy loans from these sites, you should make a point of opening up yourself to enjoy lower interest rates and friendlier terms.
- Failure to check your eligibility for the loan
You could fail the eligibility test if you have a residential problems i.e. lack of a permanent address. You may also be deemed ineligible for a loan application if you are servicing another loan from the same lender. If you are perceived to be of unsound mind, you will also miss out on the loan.
In conclusion, personal loans are your best option when it comes to funding your business. They are affordable and you may not need collateral for the loan application to be approved. Therefore, if your loan application is declined, it can only mean that you made a mistake on your end. Avoid and rectify all the mistakes listed above to get your loan approved and to enjoy the lower interest rates.