Applying for a loan is a whole lot more than just filling out an application and hoping you get it – it requires an understanding of the loan options that are available, their features as well as the requirements of the lender. Knowing all this makes it easier to get the money you need when applying for a loan.
Credit can be a powerful tool to achieve your financial goals, but it can also become a nightmare when you are not clear about the use of that money or which option will be most suitable for you based on your needs. This is why we’ve come up with a series of tips for you to keep in mind when applying for a loan.
Here are five things to consider before seeking out a loan:
1. Types of Loans
Before applying for any loan, it is a good idea to get in touch with different financial institutions to find the various options available so that you can choose one that suits your needs and ability to pay.
Generally, we find 5 types of loans:
- Personal loans
- Commercial loans
- Mortgage loans
- Vehicles loans
- Students loans
There are different kinds of personal loans available nowadays. Secured loans require collateral, which the lender has the right to seize in case you default on payment. Common examples are mortgages that are secured against your home or vehicle loans that are secured against your vehicle. Secured loans tend to have lower interest rates than unsecured loans, as the lender faces less risk. Unsecured loans, on the other hand, carry a higher risk for the lender and are only granted in case of a high credit score.
Loans can also be divided into two categories based on the type of interest rate being charged. Fixed-rate personal loans come with a fixed interest rate, meaning you will have to pay the same amount of installment every month – this makes it easier to set a budget as you know your liability will not change. Variable-rate loans, on the other hand, have varying interest rates that are dependent on certain benchmarks set by the bank.
As for commercial loans, you can find microcredits for entrepreneurs, short-term or long-term loans, equipment financing, venture capital and so on. The important thing is to know what you need the funds for – personal needs or capital for your business venture. You should also think about the urgency with which you need the money. Depending on the time you have, you can apply for a long-term loan or a microloan. The latter is much easier to obtain, with quicker processing time.
2. Interest Rates
Since most banks and financial institutions are willing to compete for business, it may be a good idea to shop around for the best possible interest rate. A little bit of extra research can save you a significant amount of money in interest payments.
Just make sure there are no hidden charges included in the price such as creation fees, subscription fees, management fees, credit report fees, processing fees or any other fees, in return for a low-interest rate.
3. Loan Duration
When a loan is acquired, money is being borrowed, which you agree to pay back over a certain time and at an interest rate agreed with the entity. The cost of the loan will be affected by the time it takes to pay it – remember that the faster you pay off the debt, the less interest you need to pay.
However, some institutions charge an additional fee if you repay the loan in less time than the term of the loan. Thus, if you are obtaining a loan and there is a possibility that you will be able to repay the amount in full before the due date, be sure to ask about any penalty for prepayment that may be charged.
Alternatively, you should also consider your ability to make periodic interest payments over the loan duration. In order to ensure you will have everything under control, it is a good idea to set up a monthly budget and spend accordingly so that you can meet all your commitments. When securing a loan, you agree to make payments according to a commitment; if you delay these payments, you can be charged significant penalties as a result. Not only that, the lender can file a report to the credit bureaus, which will affect your credit score and your ability to secure future loans.
4. Initial Payment
When you choose to purchase major assets such as property or vehicle through a loan, you normally have to make an initial payment or down payment to cover a proportion of the cost. This is often a requirement on mortgage or car loans in order to get your funding approved.
Even when initial payment is not required, it is a wise idea to make it if you have the funds as it will help reduce your liability. The more money you pay upfront, the lower the amount to be paid over the course of the loan.
5. Your Current Financial Situation
This is undoubtedly the most important aspect when applying for a loan and making the decision of whether to ask for money or not.
When you are applying for a loan, it is important that you take the time to compare the different options offered by the market. Currently, various financial institutions offer you a wide variety of loans, from which you can select one that best suits your needs.
Keeping track of your expenses and income and preparing monthly and annual budgets can help you understand how much you can afford to pay monthly on your loan, which helps you decide on the best loan option.
When you do decide that you need to borrow money, it is a good idea to check your credit history to make sure the best possible loan will be approved. You can request a report from your Credit Bureau. Check that all information is in order and report any discrepancies immediately.
Before signing the loan papers, you must ask all the necessary questions to be clear about the commitment you intend to enter into, which will avoid unpleasant surprises and difficult situations once the loan has been disbursed.
What should you ask?
Before acquiring a loan, it is recommended that you ask the lender the following questions:
- What is the interest rate, and is it fixed or variable during the term of the loan?
- What costs must you bear when applying for the loan?
- Is it possible to modify the initial conditions of the loan at some point in time and what are the consequences of doing so?
- Why do I have to sign a blank promissory note?
- If advance payments can be made to the debt, do you have a fine or penalty which must be paid?
No matter what type of personal loan option you decide to opt for, it is important that you ask questions and understand the commitment you are signing up for first. Applying for a loan is an important step during which many people fail to think logically; they just see it as a solution to get out of an economic problem, instead of contemplating what sort of agreement they are getting themselves into.
Although it takes time, it is much better if you consider a few important things before you make your decision. Keep these tips in mind and you won’t go wrong with your borrowing choices.
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