Life happens. Sometimes you need extra money to cover an unanticipated expense, like when someone in the family gets sick, car breaks down, and payment for kid’s tuition fee falls short. Sometimes, you also want to upgrade your lifestyle by buying a new home, a new car, or going to college.
That’s where loans come in handy.
Whether it’s a small, unsecured loan designed for emergency situations or a big, secured loan for purchasing a house or a car, here are five things to keep in mind when taking out a loan.
Assess your needs
The first step is to determine the amount you need to borrow and the reason for taking out such loans.
How much do you need?
Where will you use it?
Is it urgent?
Borrow only what you need and repay your debt on time. If it’s a small amount, you might want to explore a stock of options that don’t involve taking out money with interest. You may “steal” from your savings account, ask for an advance on your paycheck, sell possessions you don’t use, and capitalize on your hobbies.
Understand the loan
The next step is to compare different loan types to decide what particular variety of loan is suitable for your needs and financial capacity.
Are these loans short-term or long-term?
Are they secured or unsecured?
How much is the maximum and minimum amount you can borrow?
How high is the interest rate?
What are the advantages and disadvantages of the loan which might affect you?
Qualify for the loan
To assess if you are qualified for the loan you’re applying for, you may ask yourself these three questions:
1. Are you creditworthy?
Lenders, especially providers of unsecured loans, primarily ground their analysis on how likely you are to keep up with your payments (and how likely you are to default on your payments). That said, it’s a must to check your credit score. The lower the credit score, the higher the interest rate.
Fair: 650 – 699
Poor : 649 and below
You may request a credit report from a bank or credit issuing company you transacted with recently. If you have a poor credit score, you usually have two options: to settle for a high-interest unsecured loan or consider a secured loan.
2. Do you have a marketable collateral?
If you’re going to take a secured loan, like a mortgage, auto, or home equity loan, you must have a collateral. It is a form of security interest granted over an asset or a property to secure the payment of a debt. The item could be a house, an automobile, a certificate of deposit, or even personal savings.
3. Can you keep up with the terms of the loan?
Commitment is a big word. List down all your expenses, from your grocery expenses to utility bills, and debts. Then, check your monthly income. Is there a room for the additional monthly installments? Make sure you can commit before signing the agreement.
Evaluate your monthly budget to determine the areas where you can cut. For instance, you may want to pause your monthly cable subscriptions, trim down your grocery list, limit restaurant dinners, avoid engine fuels, and start taking public transportation.
Choose your lender
Reputable lenders make the loan work for you. Unscrupulous lenders make the loan work against you for their own benefit.
Investigate lending companies you’re going to transact with. Your best bet is to pick trusted, state-licensed financial institutions with a solid reputation. They might be quite demanding with qualifications but you’re sure they’ll give you the best experience possible.
Do you have a good credit file?
If yes, then getting a loan from a bank or credit union you’ve already built a relationship with wouldn’t be a problem. Since they’re already aware of your financial capacity and credit history, you’re likely to get approved and you may even be eligible for a low-interest loan.
Do you have a bad credit file?
Seek private lending companies which cater to people with lower credit score. The good thing about these companies is they have lower operating costs plus faster application and disbursement process, unlike traditional financial institutions.
You just have to be extra careful with whom to choose, since there are a lot of lenders who prey on individuals in dire need of cash. Never fall for lenders who guarantee you a loan immediately despite your poor credit file.
Submit your application
Lenders dig deep into your profile by obliging you to provide these major requirements.
Proof of Identification. Provide valid IDs that contain basic information: name, age, address, contact number, social security number, and signature. Company IDs and government IDs such as passport and driver’s license are good examples.
Proof of Billing Address. Present utility bills, credit card bills, a copy of your lease, and other documents that contain your present address.
Proof of Financial Capacity. Present copies of your income statements such as payroll advice for the past 30 days as well as tax records.
Information about any other current debt. Provide copies of credit card bills and other statements that show your debt obligations.
Information about the amount to be borrowed. Next to indicating the amount to be taken out, lenders may also require you to disclose the purpose of taking out such loan and how it will be spent.
Author Bio: Sophie Harris is a resident writer for QuickCash, an Australian-based business, providing quick cash loans and payday loans for one’s short-term borrowing needs. Writing informative content about business and personal finance is her cup of tea.