Things To Know Before You Take A Loan
Looking to get some money for that new venture you’re starting out? Or, the new car you’re buying? Finding the right loan can be tough – pretty much like finding the right mortgage.
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Some of the variables you need to consider include the interest rate, the penalty for not being able to pay on time, and your eligibility. The interest rates you have to pay, for instance, may depend on your credit score.
Know how taking loans work before you go ahead and borrow money.
We have written down the nine fundamental things you should know before applying for a loan.
Why do you need money?
Realizing why you need the money is the first step, to begin with.
A personal loan, for instance, is taken to cover emergencies or medical bills. According to a survey by Finder, around 40% of the consumers take out loans for emergencies like a car accident or a flooded basement, and medical emergencies.
Yet, almost 69% of Americans cannot afford emergency savings worth $1,000.
While you may take a personal loan to buy a vehicle, knowing the breakup of cost and total expenses can help you chalk out a profitable finance strategy for you.
If the loan takes a significant chunk out of your finances, look to an expert for guidance.
Loan Eligibility
The second step is to check your eligibility and meet the necessary requirements to qualify for a loan.
Lenders can be seen as investors who invest when they see a profit. In other words, the lenders will only sanction the loan after checking your ability to repay the loan.
You need a good credit history to get a loan with a lower interest rate. Your income is also another contributing factor that helps lenders judge how much you can pay back over time.
If your credit history and income aren’t enough, securing a loan against collateral is your next best option. The collateral is something that the lender can sell if one fails to repay the loan in the given time.
Duration of Reimbursement
The repayment period for a loan should be kept short. It is considered suitable to choose the fastest possible repayment cycle – where you can pay the loan in 6-18 months. However, the short-term loan period usually means an increase in the figures for monthly payments.
Affordability
If you must get a loan, be realistic when deciding its amount. Know how much you can afford to pay back. Even if you can afford the monthly payments, you don’t need to afford the entire loan. Various studies have shown that over 40 million Americans live in houses beyond their affordability.
Interest rates also change the amount of your payment and at times, even the term of your loan period. Compare the market for interest rates and then secure a loan at a reasonable interest rate.
Decide on the type of loan you wish to take. This is where your credit score comes into consideration. Your credit card history and your credit score are the primary sources of life for your financial health.
Your Credit Score
Without good credit, you wouldn’t be able to get a suitable mortgage. Did you know that 40% of Americans do not know their credit score? Your credit score determines your creditworthiness. It helps the lenders understand whether you are capable of repaying the loan or not.
Having a good credit score means your bank will offer you a much lower interest on your loans, hence reducing your down payment and aiding in long term savings. Even if you are not aware of your credit score or your credit history, you must reach your bank to get a copy of your scores every year.
Monthly Instalment
One of the crucial numbers to bear in mind when applying for a personal loan is the monthly instalment charge. The amount you pay each month will depend on the debt, the interest rate, and the repayment duration.
Your lender will tell you the monthly instalments before you take the loan. Go for the one that best fits your current financial situation.
Learning The Codes
Be aware of all legal and financial terms involved in taking a loan. Learn the terms and conditions related to your Annual Percentage Rate (APR) and the total amount that you will be paying in the future.
Some of the terms that are looked over during loan discussions are:
- Loan Origination: Most banks charge 1% of the loan amount as the origination fee. Some banks may waive this fee should you ask.
- Fail Payment Fee: If you make a payment without having enough balance, lenders will charge you for the payment failure.
- Prepayment Penalty: This is a penalty charged when you pay off your loan early than your tenure. Banks with such payments must always be avoided. This charge is to cover the interest that will be lost if the payment is made early.
- Late Payment Fees: Most lenders will charge you the late payment fee even if you delay your payment by the day. Some considerations might have it waived, but not all. Hence, the deadline should always be kept in mind.
Improve Your Credit Score
Perhaps the trick to getting a better loan is to first have a better credit score. Before you apply for a personal loan or a business loan, we recommend searching for alternatives from the government. With a better credit score, you get a lower interest rate. And that helps lessen your burden when you take a loan. Improve your credit scores and then take a loan.
There are special programs that help individuals with low credit ratings, for instance.
