For those of us with personal needs to cover, taking a personal loan is inevitable. However, going for a loan is a major borrowing decision that intimidates first-time borrowers. Potential pitfalls litter the loan journey.
There are several things to predict whether personal loans are suitable for us. Besides, we should also determine which lender is the best. Let’s dive in and unearth the crucial tips to consider before making a loan decision.
The primary metric that lenders use to assign loans is our credit scores. Credit ratings showcase how risky a borrower we are. It also informs the lender of the interest rate they should charge before lending. The final decision of whether to lend or not comes down to the nature of our credit ratings.
The higher our scores, the more likely our loans can be approved. The said loan will also attract favorable interest rates. Before borrowing, we need to assess our credit reports and critically examine the credit scores. The things that hurt our credit ratings include maxed out credit cards, defaulted previous loans, getting a judgment, late repayment, high credit balances, and home foreclosure.
Our net-worth plays a significant role in determining the amount and approval of loans. Lenders probe assets and liabilities to find out what we are worth. Assets are things of economic value that we own.
It can range from properties to investment accounts. On the other hand, liabilities are our obligations like mortgages and auto loans. There’s no way a lender can hand out colossal amounts to individuals with insignificant assets.
Personal loan applications always require proof of income. Our monthly/weekly take-home is used as a yardstick to measure our ability to repay a debt. Employees need a salary letter or W-2 forms, while self-employed individuals must avail the tax returns of previous years.
Before taking a loan, we should inspect our monthly incomes and determine whether we can comfortably repay. It doesn’t need to be the primary income only. We can add up alternative streams like freelance jobs, side hustles, and a spouse’s income.
It might look obvious, but we need a concrete repayment plan even before applying for a loan. Always consider whether the loan will be serviced weekly, fortnightly, or monthly. Such factors determine which loan we should pursue. We should also be aware of our monthly debt obligation. It isn’t realistic to repay loans, yet we struggle to meet essential obligations like rent and mortgages.
The most vital step when filling out a loan application is reading the fine print. The terms detail information such as the repayment period, monthly deduction, fees involved, interest rates, penalty fees, and other special conditions. The fine prints become legally binding once they are signed. Keep in mind; individuals cannot feign ignorance to loan terms if they undersigned on their volition.
Every personal loan we borrow must have an intended purpose. Going into debt is a significant financial decision that shouldn’t be rushed. We need to spend enough time deliberating on whether we should incur debt or it is better to dig into our emergency funds. Are we borrowing to solve a need or a want? If it’s something that can wait, it’s advisable not to take a loan.
If put into good use, personal loans can be beneficial. They can be used to cover bills, home improvements, emergency costs, and moving expenses. By considering the above things, we can comfortably walk into any lender and make the right financial decision.