What Mistakes to Avoid When Applying for and Utilizing Microloans
Microlending is a service that makes financial support from non-profit organizations more accessible in the market. You won’t need to pass through extremely strict checks as in the case of traditional loans, and these offers are overall rather entry-level — no need for a good credit score, for instance. Nonetheless, knowing its dos and don’ts will save you from beginner mistakes and wasting funds on microloan-related troubleshooting and post-recovery strategy, Fasten your belts!
Paying Zero Attention to the Loan’s Length
A microloan’s length is more than just crucial. That’s how you can define whether you can afford to cooperate with the target lander on their terms or not. A lot of consumers mistakenly believe that the longer the term is, the better the project will be — they will have enough time to repay loans.
In practice, despite a lower monthly payment for such microloans, the total interest to repay may ruin all the deal’s beneficial side. It may turn out to be more expensive than what you originally thought. From this perspective, it is crucial to measure interest rates and calculate your spending on them for shorter and longer loans:
Let’s assume you take a microloan of $20,000 at 11% with a repayment schedule lasting three years. With a monthly payment of $654.77, the total interest paid will be $3,571.88.
If your loan term is five years with the same loan sum and interest rate, your monthly payment changes to $434.85 with a total interest sum of $6,090.9.
As you see, the difference for the same loan sum will be substantial with a change of one parameter — the program’s length. In this example, it will be $2,519.02.
Failing to Recognize the Best Offer for Your Needs
The lack of market research can be a huge obstacle. Even if you are in a hurry and want to receive funds as soon as possible, this check is a must to ensure you won’t miss out on real microlending opportunities. It could lead to less favorable interest rates and higher repayment sums in the long run.
The best offer in this case means the following:
lower interests;
flexible repayment terms with no penalties for switching the schedule.
You can simplify the challenge by utilizing additional systems to analyze loans and their conditions — loan matching tools, for example. Take the most out of the pre-approval microloan period to see more personalized details of programs from several service providers. It won’t harm your credit.
Underestimating the Role of Credit Score
While microloans are designed for people with little to zero credit scores, it doesn’t mean lenders don’t adjust their programs accordingly — better conditions for customers with higher creditworthiness. For service providers, it is essential to see you can repay the loan and stick to the plan. Before applying for a loan, you can use additional solutions to start building your credit score:
The well-thought-out use of credit cards will come in handy. You will need to cover the interest only when you employ credit funds. The sums they offer are usually less impressive than microlending budgets, but they can be a good start.
You can submit reports to the credit bureaus directly. Use your bills like those for utility services and rent payments to prove your ability to follow a certain payment schedule accurately and without difficulty.
Some lenders also tend to deny applications from borrowers with zero credit scores. So working on its value in advance will always be an excellent tactic and security measure to ensure your access to financial support from third parties whenever needed.
Forgetting About Penalties and Fees
Although microlending is a marvelous solution for beginners with no to poor credit history, the lack of attention to detail may become your highway to more financial stress and losses. Don’t overlook the target loan’s conditions — it may cost you money:
Prepayment penalties — some deals allow strict payments only, which implies extra charges if you want to complete the deal before its due term.
Origination fees — you will need to cover the cost of the target lender’s preparations for the deal from a legal perspective, which can amount to 1% through 8% of the microloan budget.
Late payment fees — as the name implies, you will be held responsible for failing to repay monthly payments and interest.
Returned check — if your financial service provider doesn’t transfer the funds to the lender properly because of technical or other issues, you may also need to cover the cost of the extra penalty for the inconvenience.
Application fees — some lenders expect borrowers to invest certain sums to qualify for the microloan application process itself.
With timely and well-thought-out payments, it won’t be Mission Impossible to ensure any of the fees above will be your problem.
Key Takeaways: Always Read the Fine Print
Your approach will determine whether you are satisfied with your microloan or not. It is a must to get acquainted with all the documents from the lender — there might be ambiguous elements and errors, including interest calculation mistakes, or hidden charges if you use certain financial tools for payments. Navigate through the market to locate a microloan with maximally effective terms for your needs — the right term, lower interest, and other parameters that will help you complete the deal on time and without unforeseen circumstances.
