Loans are really convenient. They can provide you with the finances you need to do anything from pay bills and covering unexpected expenses to buying a home and paying for education. When you don’t have the funds upfront to purchase things you want or need, loans give you the coverage you need allowing you to repay the large lump sum in smaller monthly payments over the course of a few months or years.
As great as loans can be, however, most people don’t do their due diligence before receiving one. They receive the funds, use them for what they need, then get themselves in a world of trouble trying to pay it back. To avoid this chaos, it is essential that you consider these factors before taking out a loan.
Which Loan is Best Suited for You?
There are several different types of loans you could apply for. Each loan type comes with a different set of requirements and repayment terms. Unsecured loans are the most common. These are loans provided in a large sum and then repaid in installments over the course of a predetermined timeframe.
Secured loans are loans that require you to have collateral. Should you not repay the loan in time, whatever assets you offered to qualify for the loan become the property of the lender. Fixed-rate loans are loans in which the interest rate remains the same throughout the duration of the loan. Variable-rate loans are those in which the interest rates change based on the current market. Lastly, there are peer-to-peer loans that are funded by private investors.
How’s Your Credit?
Though there are lenders who offer a no credit check loan, most traditional loans through banks or private institutions require their applicants to have stellar credit. In fact, your credit score and history are a huge determining factor to how risky it is to lend you the funds. If your credit report shows a lot of missed payments, a high debt to income ratio, or a number of chargeoff and collection accounts, you’ll be considered high risk. This could get your application denied. On the other hand, it could also result in lenders limiting how much they’ll let you borrow, increasing your interest rates, requiring a higher deposit, or demanding that you have something of value to put up as collateral.
Applying for a loan with bad credit can essentially cost you more money. So, check your credit prior to applying and try to clean up things to increase your chances of getting approved and reducing your out of pocket costs.
What Can You Afford?
Though lenders use a series of factors to determine how much they’re willing to lend you, only you know how much you can really afford. All too often, people accept a loan offer without knowing how they’ll make the monthly payments. This causes them to skip payments or neglect other bills in order to cover the cost of the loan.
Before applying and/or accepting a loan, ask yourself how much you can afford. Review your monthly budget to see how much extra money you have at the end of each month. Whatever that amount is, your loan repayment amount (principal, interest, and additional fees) should be less than or equal to that amount. Anything over this amount will cause more harm than good. So, if a lender offers you a $5,000 loan but you can only afford $2,500, it would be wise to ask for a smaller loan to avoid falling into debt later on.
Which Lender is Right for Me?
The last question you want to ask yourself before applying for a loan is which lender is best for you. When reviewing potential banks, private institutions, or peer lending platforms, you should do a comparison to determine which works best. You want to look at the company’s reputation by checking consumer reviews, review the various loan options, eligibility requirements, out of pocket costs, and repayment options.
Whether you’re dealing with a financial emergency or want to get funds to start a business, buy a home, or send a kid to school, applying for a loan can provide you with the cash you need. Not only do you get access to the cash you need, but you also have an opportunity to diversify your credit portfolio and boost your scores. The only way to reap these benefits, however, is to ensure you have asked and answered the above-mentioned questions.