No matter how careful you are with your finances, unexpected expenses can sometimes hit you completely out of the blue. A medical bill that appeared from nowhere, home renovations, a sudden urge to take a vacation to avoid suffering a burnout… and the list goes on. Understandably, no one should just jump into applying for a loan without a solid ground on how things work in the financial realm, so in that spirit, here are 8 things to know before you proceed:
1. Have a plan on how to repay it
Not having a steady stream of income and trying to apply for a loan is a bad idea. Not only will you not be able to repay it on time, but it’s also highly unlikely you’re going to get approved in the first place. Even if you do have one, you’re going to need to gather all the necessary means of proving it before you apply. Usually, a letter from your employer will suffice. For those of you who are self-employed, it gets a bit trickier, but it’s still doable – just dig up the tax returns for the past two years and that should be it. If you have money coming in from other sources (such as part-time work), you’re going to have an easier time paying back the loan.
2. Minimize the lender’s risk
Your finances can be examined from a purely mathematical standpoint. The lender will take a look at your assets and subtract your liabilities; that’s how your net worth is determined. The former is a sum of what you own – such as your property, and the latter is a sum of your obligations – such as your mortgage. Understandably, the lender is running a business, and as such, looking for ways to minimize the risk is of paramount importance. So do what you can to present yourself as a financially stable individual and gather all the evidence necessary to back your case.
3. Know there are different types of loans
Depending on your needs, there are different types of loans you can choose from, with personal loans being the most popular ones by far. While some lenders have tighter requirements than others, there are personal loans guaranteed approval. Otherwise known as secure loans that are backed by collateral, these are particularly suitable for people with no credit history whatsoever. Then again, if your interests are of commercial nature, consider getting a business loan; once again, there are plenty to choose from. Lines of credit, term loans, equipment financing loans, and so on. There are also specialized loans you can apply for such as auto loans or student loans. When it comes to loans in general, there is no one-size-fits-all solution – it always depends on your needs.
4. Interest rates are one of the most important considerations
Interest rates have a great deal of influence on how much you’re going to end up paying in total. It’s hard to give any general advice on the subject because these can greatly vary from lender to lender. In fact, they can be anywhere between 5% and 35%, which can make quite a substantial difference, especially over the long term. Note that interest rates may not be the only fee you’re going to end up paying. Some lenders will charge you processing fees and some of them even impose a penalty for paying off the loan early, costing them valuable interest rate earnings in the process. Bottom line: every lender is different so always make sure to do your due diligence.
5. It’s a good idea to exhaust your other options first
There are alternatives to getting a loan, all of which should be considered before applying. If you have friends or relatives who could be lending you some money, it’s always better to ask them for help first. After all, no one will offer you as favorable terms as them; in fact, they may not even ask you to pay them back (but make sure to have a clear dialogue about the topic at the very beginning, otherwise you may jeopardize your good personal relationship with them). But if they insist on repayment – which they have every right to – it’s good practice to formalize the agreement in one way or another. Even so, there’s no need to be a burden to your friends and family, as there are other options; credit unions are one of them, and if the situation is suitable, you may even turn to your local church or get in touch with a charity.
6. Every loan comes with its own set of requirements
Depending on the type of loan you’re after, there will always be some requirements you need to comply with. But the following requirements universally apply to all of them:
– You need to be at least 18 years of age.
– You need to be a resident of the country.
– Your financial circumstances need to be proven.
– You need to have a steady stream of income.
Bear in mind this is the bare minimum – depending on the lender, other requirements and restrictions may apply.
7. Know the common loan terms
You’re probably familiar with the interest rates already; basically, this is a portion of the repayment the lender collects each month. The loan term is the total number of months you’ll be paying it off. The annual percentage rate is what the lender will charge you in addition to the interest rates. Finally, the principal is just a fancy way of describing the total amount of money borrowed. This is the basis on which the lender charges you interest rates. As you keep pacing back the loan, the principal decreases, and so do the interest rates.
8. Make a couple of price comparisons
Don’t just dive right in and pick the first lender you see. If you take a little bit of extra time to do some in-depth research which includes comparing prices online, chances are you’ll be able to find a much better deal in general. While you’re at it, it’s good to check up on their online reputation by visiting customer review portals and social media. As much as the lenders can afford to be picky in regards to who they take on board, you – as the loan taker – must be at least equally as careful and only work with the ones you can trust.
Conclusion
Based on these valuable pieces of advice, applying for your next loan should be a breeze, as long as you’re aware of your options. So make sure to do all the research necessary and only apply for a loan when you’re completely comfortable with it.
