Getting a loan is a big step. Even if it’s a small loan. It has the ability to increase or tank your credit standing – a critical part of your life - so it’s something you should consider very seriously before you sign your name and commit yourself. After that happens, there’s no going back. So here are some important things to look into and think about before you decide to move forward.
Do you really need a loan? Is it possibly something you should save up for like a holiday or motorcycle? Are you looking for a debt consolidation loan to get your credit rating on the right track? Or do you want to buy a new vehicle, or the home you’ve always dreamed of? Is a loan the right choice for your needs?
Can you afford to get a loan? Odd question you may think, but look at it this way. You’ll have to make monthly payments and make them on time so you don’t get late payment charges added on – and every late or missed payment is also a strike on your credit rating. It’s a good idea to have some kind of financial cushion in place to cover a couple of payments in case you’re laid off, or run into difficulties.
What condition is your credit score in? How high your rating is will not only affect your interest costs, but your chance of getting a loan at all at any of the major financial institutions. You may want to bolster up your credit score before you apply for large long-term loan.
Do you know what you need to provide in order to get a loan? In some cases your credit score and proving your income may be enough. In other cases, be prepared to supply paperwork in the form of tax returns and bank statements for several years, along with proof of income and assets.
Where do you get your loan? Do you go to an established financial institution like a bank or a private mortgage lender, do you borrow it from your credit card or head down to a pay day loan outlet? It all depends on your needs and your credit score.
What type of loan should you choose? The easiest to get is a secured loan, because it requires a tangible asset like a house. You’ll also get a lower interest rate than an unsecured loan. But there’s a catch - if you can’t pay, and you default on the loan, you lose your collateral. An unsecured loan is only available to people with good credit history and high credit scores.
What kind of rate should you get on your loan? With a fixed rate you know what you’ll pay every month. A flexible rate can vary annually or quarterly depending on the state of the economy. So you may end up paying more or less interest than with a fixed rate. Your choice depends on the type of loan you choose and the level of risk you’re comfortable with.
Are you limited as to what you use the money for? For personal loans, you can use the money any way you want, but when it comes to a mortgage, a car loan, or a student loan, you can only use the money for specific things. Ask about any limitations.
What if you want to pay off the loan early? Some lenders have penalties if you want to pay the loan off sooner than planned. Make sure to ask what your options are for early payment.
What happens if you can’t pay your loan? Sometimes things go wrong – you lose your job, you have a serious illness – and you just can’t make those payments anymore. Find out what happens in the case of late payments, missed payments, and non-payment so you know what to expect.
A loan can be helpful – such as having only one monthly payment to a debt consolidation loan, or financing the home you raise your family in. It can also be a nightmare if you make the wrong choices or experience a bad situation like losing your job or your health. The best way to approach getting a loan is to research everything you can, ask a lot of questions, and get advice from a knowledgeable someone you trust. The bottom line - be realistic and be prepared!