Before taking out a loan it is imperative to do your research and make sure that you have a good understanding of all terms and conditions surrounding the loan – the associated interest rates, the repayment terms, what happens in the event of a default on a payment, etc.
This guide discusses the basic loan information that everyone should know to help prepare first-time borrowers and help them to understand what they should expect.
Are You an Eligible Candidate?
Once you’ve decided that you want to take out a loan and submitted your enquiries to the bank or lending provider, they will conduct several background checks in order to determine as to whether or not you are an eligible candidate. The specific checks conducted vary depending on the nature of the loan.
If you are taking out a private loan, it is typical for the lender to conduct a credit score check. They will also need to obtain other information from you in order to get an understanding of your financial situation and ensure that you will be able to repay them. Information that may require includes details about your job, salary, and how long you have been working on your current post and potentially other factors.
If you have bad or no credit you should try to work and repair your credit and build up your score so that you have more credit and lending options open to you in the future. Having bad credit may mean that you are eligible for loans that do not necessarily have the most optimum rates (ie they have higher interest rates or stricter penalty clauses) or they may require you to have a cosigner who will act as your guarantor if you are unable to make a repayment.
Federal or student loans have slightly different requirements and the candidate’s eligibility is based more on their needs. You can find out more information about student loan requirements here.
Remember that if you are not a desirable candidate for a bank loan, all hope is not lost and there could be other options. Consider finding extra ways to make money online, taking overtime at work, or finding check into cash near you for a payday loan.
How Much are You Eligible to Borrow?
How much you are eligible to borrow from a lending provider depends on your background and credit rating. As you would expect, the higher your credit rating, the higher the amount you are entitled to as you have proven yourself to the banks as someone who can be trusted to pay back the money and adhere to their terms and conditions.
Understand the Interest Rate
The simplest way of understanding an interest rate is to look at it as the lenders’ fee for you to borrow their money. Loan interest rates vary depending on the type of loan that you are taking out (student loan, personal loan, etc), the borrower providing the loan, and the credit rating of the person borrowing the money (i.e. some providers will loan money to individuals who have a bad or non existent credit rating, however, they also issue higher interest rates and fees for missed payments due to the risks of lending to these people). The interest rate is calculated as a small percentage of the amount loaned. Interest rates can be either fixed or variable.
Fixed Interest Rates
A loan that has fixed interest rates has interest rates that will remain unchanged for the duration of the loan term. For example, if you take out a loan for $3,000 and the interest rate is 6%, then the interest rate is going to be 6% for the duration of the loan until the money is repaid.
Variable Interest Rates
Variable interest rates vary over time and are typical based on a standard market rate. The fluctuations of a variable interest rate mean it is more difficult to determine how much you will pay out each month/year, however, they also mean that you are never paying over the odds if market conditions move to a position that is favorable to you.
Are There Any Associated Fees?
If you take out a private loan from a bank or some other form of financial institution, there is often a fee that is charged to cover the costs of processing the loan. This varies depending on the lender. When considering taking out a loan, you should always review a few providers before committing to one, ensure that they are appropriately licensed, and do your comparisons to ensure that the lending fee is not excessive.
Oftentimes people find themselves in more debt and discover that they are worse off financially after taking out a loan because they do not review all of the terms and conditions in order to understand the implications and conditions of borrowing the money. One area that is important to review is around payment terms. Some providers will present you with a range of borrowing options – I.e. they may offer you a selection from 12 months, 24 months or 36-month repayment rate.
Repayments may seem smaller over a longer period but the interest will be relatively higher. Make sure that you can actually afford to take out and repay the loan and calculate precisely how much it costs you on the whole for borrowing the money.
The flexibility offered in the payment terms varies depending on the type of loan and the lender. There may be high fees and strict penalties to be incurred if you miss a payment on a loan to ensure that you are aware of this also before you sign on the dotted line.
Manage Your Money the Right Way
You don’t need to have an extensive financial education to become good at managing your money and understanding finances. Having a loan aside, you should try to forecast your personal expenses as the same way you would in a business if you are to get a good grasp on your financial situation.