10 Critical Things To Consider Before Applying For A Loan
Loans help you establish or sort out issues in difficult times. But be very careful before and when going in for a loan.
Loans come in all different shapes and sizes. Understanding what loan options are available and what lenders need from you, will make it easier to get the money you need.
Before you actually make an application for one though, it is really important to understand the dangers of payday loans and to understand as much as you possibly can about payday loans before taking one out.
Before talking about these 10 critical things you must know before going in for a loan it will be good we, first of all, understand the purpose and different type of loans.
10 Critical Things To Consider Before Applying For A Loan
Understand the purpose of a loan
Anyone thinking about taking out finance needs to understand the purpose of why lenders make short-term loans available to borrowers
1. Types of Loans
Before you decide to borrow money, understand the different loan options that are available.
a) Personal loans.
- Secured loans: Personal property is offered as collateral and may be granted to individuals with poor or no credit history.
- Unsecured loans: Based on credit scores; no collateral is necessary.
b) Business loans. Only a few are listed below. For a more comprehensive list of business loans available, contact your bank or financial institution.
- Term loans: General purpose loans that are paid back over a set period of time.
- Short-term loans: Smaller loans that are taken for periods of less than one year and paid back in one lump sum.
- Equipment financing: Loans granted for purchasing equipment; equipment is used as collateral.
- Lines of credit: Specific loan amounts are granted per year on an as-needed basis; these loans usually need to be repaid quickly.
- Small Business Administration (SBA) loans: Loans offered by banks or financial institutions that are guaranteed by the SBA. For more information about the different types of SBA loans and loan requirements, visit the SBA website.
c) Student loans. Student loans may be obtained through private lending institutions or through federal aid. To apply for federal aid, visit the FAFSA (Free Application for Federal Student Aid) website.
- Conventional mortgages: Offered as either fixed-rate (interest rate is set and will not change over the course of the loans), and variable-rate (interest rates may change based on the flux of the market).
- Government mortgages: These include FHA loans, VA loans, and RHS loans.
e) Equity loans.
- Home equity loans: Taken as a lump sum against equity built into a home; money taken from these loans may be used for any purpose.
- Home equity lines of credit (HELOC): Set amount available may be taken as needed against the equity built into a home; money taken from these loans may be used for any purpose.
- Home improvement equity loans: Taken against equity built into a home; these loans must be used for home repairs, renovations, or improvements
f) Auto loans.
1. The Type Of Loan
Before applying for a loan think about what you want to use the loan for. There are lots of different types of loans in the market, henceforth it’s important to choose a loan that suits your situation and what you intend to use it for.
2. Current Financial Situation
The most important factor in deciding whether to borrow money is you. Looking at monthly and yearly budgets may help you understand just how much you can afford to make in loan payments, thus helping you decide on a loan amount.
3. Credit History
The finest rates are available to those with the good credit history. As a result of capping of interest rates, most banks are anxious about lending for risk of default. Beforehand you should check your acknowledgment score in order to know the likely prospects of getting the loan certified.
4. Interest Rate
Regardless of the type of loan, you decide on, you need to pay attention to current interest rates. These will play an important role in deciding the total amount of the loan that must be paid back.
Since most banks and financial institutions are willing to compete for your business, it may be a good idea to shop around for the best possible interest rate. Just be sure that there are no hidden fees included in the rate, such as:
- Origination fees
- Appraisal fees
- Underwriting fees
- Administration fees
- Credit report fees
- Processing fees
Fees may not cause the interest rate to increase, but they will be included in your monthly payments. If this is the case, you might be better off choosing a loan with a slightly higher interest rate instead of paying a large amount in monthly or upfront fees.
5. Loan Term
Depending upon the type of loan you need, the length of the loan will also play a part in determining your total loan cost. Since different loans are set up in different ways, and since there are so many loan lengths, it is best to discuss your options with a bank or financial institution.
6. How You Plan To Pay It Off
This seems like an obvious point but it’s important to plan out how you intend to repay the debt. Will you be paying weekly, fortnightly or monthly? Do you plan to pay it off sooner than the term? These key factors will help you choose the right loan to ensure that you avoid any unnecessary costs.
7. Penalty Charges
Refusal to repay the loan is a reality we all face. In case you are not able to pay your dues on time, there is normally a very weighty penalty indicted on your credit account.
8. Down Payment Amount
The amount of money that you put down depends on the financial institution granting the loan. Although not all loans require down payments (usually home equity loans use the house as collateral so no down payment is necessary), you may benefit by putting some money down on your mortgage or auto loan.
9. Hidden Charges
Make sure you read the fine print before finalizing a deal. There might be charges you are not aware of, especially for home equity mortgages. Find out about things like early repayment fees, arrangement charges and the like.
10. Don’t Bite More Than You Can Chew
The principal rule of clever borrowing is what the older generation has been telling us all the time: don’t live beyond your means. Take a loan that you can easily repay.
Those are the 10 Critical Things To Consider Before Applying For A Loan. If you found this helpful, please, share with your friends.
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