Nowadays, loans are a popular choice as they can make good financial sense in a variety of situations. Moreover, due to digital solutions, the loan application and approval processes have become a lot easier.
Nevertheless, applying for a loan can still be frustrating, and you’d better be prepared to present a full and accurate package for a review. This is crucial if you want to avoid any unpleasant surprises.
Loan contracts are various, ranging from personal loans like wedding loans that can be used for any personal expenses to more complex ones like mortgage, auto, business, and student loans. However, regardless of loan contract type and its purpose banks, financial organizations, and credit unions carry out a careful analysis of each loan application.
Therefore, if one has decided to borrow, several basic but straightforward rules should be followed while preparing the application.
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Carefully research all the offers on the market
Market offers can be different, and your goal here is to find the solution that fits your budget best and allows you to pay it as fast as possible. I bet you don’t want to end up with an expensive loan that you won’t be ready to pay back, with unclear terms and conditions.
Therefore, the first step the borrower should take is carefully studying the market proposals. Nowadays, one can quickly analyze multiple loan options online as most of the lenders provide detailed information on the websites. Nevertheless, in a wide variety of loan options, opting for the best and cheapest loan can be complicated.
Therefore you should be aware of the factors you’ll have to take into account while comparing the pros and cons of each offer.
In order not to get lost, there are some basic things to consider and analyze before choosing the perfect loan for you:
First, make sure to get a good look at the interest rate and/or annual percentage rate (APR)
These factors are of paramount importance while determining the suitability of the loan for you. APR or interest rate is the amount you will have to pay to your lender to borrow the money, which ultimately adds up to the total cost of the loan.
The APR takes into account various fees such as broker fees, discount points, and some closing costs, expressed as a percentage, while the interest rate is just the basic interest charged. Another essential thing about APR is that it is determined by the lender and can vary from lender to lender since it’s composed of lender fees and other costs.
Therefore, to protect the consumer against hidden fees, The Federal Truth in Lending Act requires lenders to disclose the APR in every consumer loan offer.
So, for example, if you are analyzing and comparing mortgages, lenders are required to inform you about the APR. As one can conclude, APR is a better indicator to determine which loan will be more costly for you in the long run. It should undoubtedly be taken into account in your decision-making process.
However, for the loans with a variable rate, the process of comparing interest rates of the loans are never easy. In most cases, when comparing the loans, you are looking to see if you are okay with the variable monthly payments as well as the current monthly amount set.
Do not forget about loan terms
Secondly, focus on the period of time during which you will have to repay your loan. While you are comparing the different loan terms, opt for the shortest loan term available to you. At first glance, you might feel puzzled with the fact that the shorter the loan term, the higher your monthly payments will be. Nevertheless, this way, you will be paying a lower amount of loan interest.
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Do not forget to pay attention to the full amount of payment
Next, you should consult the total amount owed, which is composed of the principal amount as well as the fees and interest. Try to choose the loan which will allow you to pay the least amount of money during its terms.
Finally, if your loan has a fixed interest rate, take a look at the amount you’ll have to pay each month to see if you can afford the loan. Nevertheless, for some loans with variable interest rates, might provide a lower amount of monthly payments than other loans. You should make sure you don’t get confused and re-evaluate whether you can afford the loan while considering all the factors mentioned above. Get the loan which has the lowest interest rate and no hidden fee.
Also, if you are short of time to carry out a major research on your own or keen on not missing any possible option, there are online solutions, which can provide you with comprehensive data and detailed information. One of the examples is NerdWallet with its loan comparison tool. You can find a complete NerdWallet review here.
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In the end, do not hesitate to make notes and shortlist the options that might suit you the best.
Once you are done with your research, look through all the questions that have bothered you, and ask for clarifications from your possible lenders. This way, you will avoid any misunderstanding or confusion concerning anything important.
Be aware of your credit score
Lenders assess the creditworthiness of a borrower and the likelihood that he or she can pay the debts based on the credit score. FICO score is the most popular credit score, which ranges between 350 and 850.
The higher your credit score, the more trustworthy you are in the eyes of a lender, which means that you may benefit from better rates. Therefore, you need to know your exact credit score before knocking on the lender’s door.
There are several ways that you could find out your credit score:
- Once every twelve months, you can get it for free. Fair and Accurate Credit Transactions Act or as it is more commonly referred to as the FACT Act, requires three major U.S. credit reporting agencies, Equifax, Experian, and Transunion, to provide credit reports to all US citizens for free once every twelve months. The easiest way to getting the report is visiting AnnualCreditReport.com jointly run by the three above mentioned agencies. Also, if you have questions, you can consult the step by step guide of getting an accurate report provided on the Federal Trade Commission official website.
- It is also worth mentioning that, there is a common fear that checking the credit score might have a negative impact on the score itself. However, checking the credit is considered a soft inquiry, and soft inquiries are not a factor in credit scoring models and therefore, don’t impact your credit scores.
- Besides the annual free report, there are also other ways of getting quarterly, monthly, weekly, and even daily free credit reports provided by different finance companies like Credit Karma, Intuit, and Bankrate. Nevertheless, the main part of these reports is based on the Vantage Score, and one should always keep in mind that AnnualCreditReport.com is the only authorized source by the Federal Trade Commission.
Now when you know your score, you can define your rating as a borrower and take necessary steps in case you feel that your rating needs to be improved. If the latter is your case, then find tips on improving your credit score here.
Balance your debt and monthly income
The facts that you do not have any outstanding debts, or they are not significant can be very attractive for potential lenders, as they would also consider your debt-to-income ratio in their decision-making process. The lower is the debt-to-income ratio, the more a lender is convinced that you are managing your finances effectively.
Therefore, reducing this ratio will not only improve your chances of qualifying for the loan but also ensure better terms. But first, let’s understand what debt-to-income ratio is and how it is calculated.
Debt-to-income ratio is personal finance measurement, which compares your monthly debt payment amount and your monthly gross income. The ratio can be easily calculated by a simple formula:
In order to accurately calculate the total monthly debt payment, you have to make sure to sum up all your current monthly payments, including credit cards.
Also, consider that gross income is your pay before taxes, and other deductions are taken out.
As the debt-to-income ratio is presented in percentages, you will have to multiply the result by 100. For example, if your result is 17%, it means that 17% of your monthly income goes to cover your current debts on a monthly basis.
Now, when you have accurately calculated your debt-to-income ratio, let’s understand whether it is considered to be a good one. In general, 43% is the highest debt-to-income that the borrower can have and still be qualified for a loan. Nevertheless, the ideal ratio for a lender is less than 36%, of which no more than 28% should be going to repaying for mortgage or rent.
If your debt-to-income ratio is too high, it might take time and some efforts to improve it. There are a number of ways to ameliorate your ratio. The most logical one is paying off your current debts, which will reduce the amount of your monthly payments, thus also reduce your ratio.
Consider a co-signer
If you doubt your ability to qualify for the loan because of a low credit score or insufficient income, then a co-signer can significantly boost your chances of getting a loan. Investopedia defines co-signing as the act of signing cooperatively with a borrower for a loan. In other words, a co-signer is a person who signs the loan contract with you and guarantees to pay off the debt in case you are not able to make the repayments.
Nevertheless, the co-signer should not be confused with the co-borrower as they receive neither any borrowed amount nor are obliged to make monthly payments. With a reliable co-signer, the lender is more comfortable to lend you money as the risks are reduced. Also having a solid co-signer can even improve the terms of the loan or increase the amount of the loan available to you.
To find a co-signer, you should start searching among your close ones. The co-signer takes a number of risks, like limited borrowing ability, harmed credit history, and ultimately making the repayment for your loan. Therefore, start with your family members and close friends. Just make sure to be candid and present all the details of co-signing, as in this case you take on responsibility not only for your future but also for your co-signer. The person you will choose should be someone who has a lot of confidence in you and your project.
It might seem tempting to borrow some extra money besides the amount you need for solving your current financial need. Nonetheless, this is not the best idea if you are really keen on getting the loan. The larger the amount you have applied for, the more chances are that you will be rejected.
The lender will be far more inclined to borrow smaller amounts as it is less risky. Therefore, if by any chance you and another person with the same qualifications apply for the same loan, but different amounts, the lender will be inclined to approve the smaller amount.
Also, it is important to consider that the smaller the borrowed amount, the easier it is to repay. Additionally, you will avoid having too much debt, which will help you maintain a good credit history and qualify for your future loans.
One can see that applying for a loan is a responsible step, which requires preparation and patience. Nevertheless, this can be much easier if you constantly keep an eye on your finances. It is not necessary to wait until you have an immediate need to apply for a loan in order to check your credit reports. In this case, you can always be prepared for your application, even if the necessity of a loan rises unexpectedly.
Also, keep in mind that patience is very important during the whole procedure. However much you have the need for financial resources; one should always consider that loans with fast approval have higher interest rates. So, even if it is very attractive to get approved for a loan in a day or even in a couple of hours, remember that you will have to make the repayment each month for many years. Therefore it is much better to feel the hardship for a certain period of time but borrow from a solid financial organization than to hurry now and regret later.
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