Getting a Loan
Getting a loan can mean the difference between having a roof over your head and sleeping at a shelter. It can mean the difference between getting a degree and dropping out of college or putting food on the table and having your kids sleep on an empty stomach. Of course, the situation is not always that dire. Sometimes, you just want to get a car or need money for your wedding. Perhaps you need a loan to open a small business. In any case, there are some things you will need to know before applying for a loan. Once you know the basics, you will need to know what to look for as well as the process of receiving a loan. The following are some general steps to help you get a personal loan.
Steps to Getting a Loan
1. Know Your Credit Score
The first thing you will need to do before trying to get a loan of any kind is to check your credit score and history. By knowing where you stand credit-wise, you will be able to have a better idea of what to expect. You will also know how much negotiation power you will have as well. You can get your credit history for free once a year at Annual Credit Report. What you will want to specifically look for is any errors that may adversely affect your credit score. Mistakes happen so you want to make sure you’re not being penalized for something you didn’t do or have done but isn’t being recorded properly.
In a day where identification theft is high, it’s important to periodically check your credit history just to make sure you don’t have any debt that you don’t know about. Also, there can be instances where you have a credit card that you already paid off some time ago that is still being shown as owed. If you do find anything wrong on your credit history, you will want to write to which ever of the three credit bureaus that is showing the mistake. We’ll get more into fixing mistakes in another article.
With you credit score, you will usually have to pay for that unless you happen to know someone who can check it for you for free. If you have bad credit, getting a loan will be more difficult and even if you do qualify, the interest rate can be through the roof. If this is the case, then you will need to spend some time improving your credit score. This can be done by understanding how your score is calculated. We’ll get into that in another article but for now, the general rules to follow is to always make your payments on time and try to keep your debt to credit limit ratio below 50%. The lower the better. Ideally, you want it under $20. That means if your credit limit is $1000, then you don’t want to owe any more than $200 – $500.
2. Determine How Much You Need.
Getting a loan will involve paying the money back eventually. Because of this, it’s important to know exactly how much you absolutely need to borrow. You will want to make sure it’s something you can pay back. If you are going to get yourself into debt, make sure it’s for a good reason. There is good debt and bad debt. Good debt is money you borrow that will be used for something that will make you money in the near future. This can be for college or for a business for example. Bad debt is money you borrow to use on things that won’t go up in value any time in the future. This includes things like cars and other consumer goods. The size of your loan will also determine where you can look. If it’s a small loan such as $10,000 or so, you try to look for lenders online. These smaller, short-term loans will be easier to get than the larger loans.
3. Learn About Different Loan Types.
Whether you are getting a small business loan, a car loan, or any other type of loan, you will want to know the different types that are available to you. Two common types of loans are the secured loans and the unsecured loans. With a secured loan, you will need to put up collateral that is equal or more than the value of the loan you are taking out. With an unsecured loan, you don’t need to have any collateral but the interest rates will be higher. This type of loan is usually only available to people with superb credit.
4. Shop Around.
In this step, you will be contacting your local banks and credit unions to find out about the different types of loans that they offer as well as what you will need to apply for those loans. Realize that the loan size will affect the depth of research you will have to do. Getting a home loan is a bit more involved in terms of paper work and other factors compared to a small cash loan for example. You will want to do your search online as well. Find out what type of interest rate you can get with your type of credit score and history. This will take some time and patience if you do it on your own. You can use a broker to help you with this as well.
If you are finding that the interest rates are way too high, then you will need to spend some time on improving your credit score. If you need the money right away, then another option you will have is to get someone to co-sign for you. This person will need to have excellent credit. You should take caution when using this approach and make sure that you can make the payments on time because you don’t want to mess up their credit in any way. Many friendships and family members have ended relationships over this type of stuff so think twice before asking someone to do this for you. Many students will use this method when getting a student loan since they may not have good credit or even any credit history at all and will have their parents co-sign for them to get better rates.
5. Apply and Finalizing.
Apply for the loan and have the right documents. Whether you are getting a business loan or getting a mortgage loan, you will need to bring the right documents to your appointment. You will need things like proof of income such as 2 or 3 months worth of pay stubs, your driver’s license, social security card, as well as income tax documents. Different lenders will need different things so make sure you ask them what is needed so you don’t miss anything.
Remember to read everything before you sign the loan papers. Make sure you understand the payment structure, any fees that are involved, prepayment penalties, etc. You will also want to know exactly when the first payment is due and for how much. The last thing you want is the miss your very first payment.
This is the general steps of getting a loan. Once you get a loan, make sure you pay on time every single month. In order to actually pay your loan off and reduce the amount of interest rates that is coming out of your pocket, make sure you pay more than the minimum if you can. Getting a loan, although difficult sometimes especially in this economy, is the easy part. Paying back the loan is the hard part. Make sure you understand what you are getting yourself into and that you have a very good reason for taking out a loan because chances are, you will be spending many years trying to pay it back. So think carefully before applying.