Taking out a loan is nothing to feel ashamed of. In fact, more than 21 million people are actively paying off personal loans in any given year.
If you’ve never applied for a loan before, the process can quickly feel overwhelming. There are so many lenders to choose from and different types of loans to consider that finding the right one seems like a complete mystery.
Though it’s challenging, getting a great loan is doable.
You just need to know what to expect before you apply. Here are a few key things to keep in mind before you start looking for a lender in your area.
1. Your Credit Score Makes a Difference
One of the most important things you need to remember when considering taking out a loan is that your credit score can make a huge difference. The higher your score is, the better the loan terms will be.
Why? Because your credit score gives lenders insight into your financial history and helps them decide if you’ll be a responsible borrower.
High credit scores show that you have a history of paying bills on time and do what you can to pay down your debts each month. Low credit scores show that you’ve struggled financially and may not be able to make the minimum monthly payments on time every month.
Before you apply for a loan, check your credit score. If it’s high, go ahead and apply. If it’s low, do what you can to raise it before you talk to different lenders.
Pay down your existing debts as much as you can. Make sure to pay your bills on time each month and avoid taking out new loans or credit cards until your score goes up.
2. Look at Your Budget Before Speaking With a Lender
Before you take out a loan, you need to take a long, hard look at your budget. Even if things are tight, you still have to make your monthly payments on any money that you borrow.
This means you should only borrow loans that are small enough that you can afford the monthly payments. Look at how much money you’re spending and how much you’re bringing in from your job or side hustle.
Ideally, you should choose a loan that has monthly payments that are smaller than the amount of money you have leftover.
Remember, borrowing more than you can afford is a great way to put more financial strain on your life. If you can’t afford to make the minimum monthly payments reliably, you can’t afford the loan.
3. The Application Process Can Take Time
Believe it or not, applying for loans isn’t always something that you can do overnight. Lenders like to take their time and review your financial situation in detail before they make a decision.
This means the application process can take several weeks depending on the type of loan you’re asking for and how much you’re trying to borrow.
The longer the loan’s repayment terms are and the more money you’re trying to borrow, the longer it will take the lender to review your application. The best thing you can do is apply for a loan before you desperately need the money.
This way, you won’t be strapped for cash and still waiting for lenders to get back to you.
It’s also a good idea to gather all of your financial information, bank statements, paystubs, and anything else the lender might want before you apply. When you have everything on hand, you’ll simplify the lending process and will help lenders make a decision more quickly.
4. The Terms You Receive Vary from Lender to Lender
Surprisingly, lenders will view your financial situation in different lights. This means that one lender might see you as a risky borrower while another might be confident in your ability to repay the loan in full.
The only way to know which type of lender you’re dealing with is to apply for a loan with several lenders. If you can, apply to at least three different lenders in your area. If you’re not sure where to start, speak with your personal bank first.
Once you have several quotes in hand, compare the details of those quotes. Look at the amount that each lender is willing to give you. Then, compare the interest rates each lender charges you.
As a general rule, you’ll want to accept the loan that offers you the money you need at the lowest interest rate.
5. You’ll Have to Pay the Loan in Full
Anytime you borrow money, you’re agreeing to repay the loan in full by the end of the loan’s term. As long as you make the minimum monthly payments on time, every month, you’ll pay the loan off by the end of the term without a problem.
However, if you miss a payment or fail to make payments at all, it will hurt your credit score. Worse, the lenders may be able to pursue legal action against you to recover the money you owe them.
If you think you can’t make payments or know you’re going to miss a payment, let your lender or banker know. They may be able to work out a more flexible repayment option or at least help you find ways to settle your debt.
Now You’re Ready to Apply for a Loan
Now that you know what to expect when borrowing money from a bank or dedicated lender, you’re ready to apply. Just remember to take your time and choose a lender that offers the type of loan you’re looking for.
Once you have a few in mind, apply to several lenders, and compare the quotes you receive. As long as you review the terms you receive, you’ll be able to find a loan you can afford with ease.
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