Applying for a loan can be a complicated process, one that requires you to submit multiple documents, sign an endless amount of paperwork, and open up your financial life to the uncomfortable scrutiny of others.
While you may not be familiar with all of the ends and outs of the loan application and approval process, there are some things you need to know before getting started. Doing your research and having an idea of what the process entails will save you headaches and frustration in the long term.
If you want to take out a loan but are not sure where to start, here are several things you need to know about before applying for a loan.
1. What Kind of Loan Do You Need?
There are many different types of loans you can choose from so it’s important to make sure you are choosing one that is the best fit. You may need a business loan, auto loan, mortgage, or a personal loan for unrestricted use. If you’re a small business owner, you’ve probably heard of the Small Business Administration. The SBA is one of the largest loan backers to small business owners in the country, so if you’re thinking of getting an SBA loan, take a look at this article, which includes everything you need to know about the SBA. You should also know if you’ll be applying for online loans or applying in-person at a financial institution.
2. How Much Do You Need to Borrow?
An important thing to know is how much you need to borrow. While choosing the highest amount, or an amount that seems to work is easy, it can also result in a payment you can’t afford or a loan that isn’t as helpful as you need. Go over your finances and see what amount will truly help you with your financial situation and start from there.
3. Are You Able to Repay the Loan?
Depending on the amount and terms of your loan, you may be paying off the loan for months or even years. It’s important to be realistic when deciding what you can pay and for how long. Take a hard look at your finances to see if paying off a loan is something you will be able to accomplish.
5. What Do You Need to Qualify?
A tip for how to take a loan out is to first see if you meet the loan qualifications.
There are a few ways to know if you prequalify for a loan, one of them is to use a prequalification calculator. Simply enter your information to get your results. While a calculator cannot give you a definite answer, it can give you an idea of where you stand.
6. What Is Your Credit Score?
Your credit score and history is one of the most important factors lenders use when deciding if you are approved for a loan. Checking your score and history will show you any problem areas you need to fix before applying for a loan.
7. What Documents Do You Need to Apply for the Loan
Depending on the loan type and loan amount, you may be asked for several different documents when you apply for a loan.
Pay stubs, tax returns, bank statements, rental history, and your birth certificate are all examples of what you may need to apply. A list of what you need should be on the lender’s website. Use this list to make sure you are prepared.
8. How Long Is the Loan Application Process?
Knowing the length of the loan application process is important, especially if you need the money during a specific time. Ask everyone on your shortlist of lenders what the loan application and approval process looks like and how long it typically takes. This is a great way to narrow down your list of potential lenders.
9. Do You Need Collateral?
Some loans require collateral and some don’t. Before you apply, ask this question to make sure you applying for the correct loan. If you do need to provide collateral, ask for more information about the type of collateral you need to provide. Collateral can be anything so it’s best to know before applying.
10. Do You Need a Co-Signer?
Depending on your credit score, credit history, and other pre-qualifiers, you may need to have a co-signer when taking out a loan.
A co-signer is someone who agrees to be responsible for the debt if you are not able to pay the loan. Co-signers have good credit and financial stability so lenders trust them to act as a guarantor for your loan. Find out if you need a co-signer so you are not surprised during the loan process.
11. What Is the Interest Rate? What Are the Loan Fees?
Getting a loan means you are paying interest and a variety of fees. The interest rate is based on a few factors but you can ask the lender for an idea of what it will be. The fees you are charged during the loan process are many and can vary based on the lender. Ask for a list of fees to make sure you are not choosing a lender with unreasonable fees.
12. Is There a Loan Prepayment Penalty?
Paying off your loan before it’s due seems like a great idea to everyone but the lender.
When you pay off your loan early, you save on interest rates, which means the lender loses on interest rates. To avoid this, some lenders have a prepayment penalty, a fee you have to pay if you want to take care of the loan early. Check with your potential lenders to make sure you won’t be penalized for paying off your loan before it’s due.
These Are the Things You Need to Know Before You Take out a Loan
Before you take out a loan, it’s important to know what type of loan you need and the amount you intend on applying for.
The interest rate, fees, application process, approval process, and repayment process are all important to know before you choose a lender to work with. It’s also essential to make sure you can comfortably repay the loan so you don’t find yourself in a worse financial hardship.
You’ll also need to check your credit score and figure out what you qualify for based on your financial and credit history. If you need a co-signer or collateral, now is the time to find out. Ultimately, the more informed you are of the process, the easier it will be.
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