However, before you take out a loan, you must do your homework to avoid mistakes and defaulting on your loan repayments. In other words, you want to make sure you have your bases covered so that your loan doesn’t cost you more than it should.
What to Know When Taking a Loan
Here’re key things you need to be clear about and know if you are considering taking a loan in order to get the best loan deal:
1. Purpose of the Loan
You need to start off with why you need to take out a loan. There are many reasons why you may want to take out a loan. You may need money for a new home, a new car, or for starting a new business venture.
The great thing about getting a loan is that you can use the funds for just about any reason.You can even use a loan to pay down your debts.
The reason why you need to know the purpose behind the loan is because you’re going to have to know whether the loan serves that purpose or not.
In cases where you’re taking out a loan to pay down debts, you’ll want to make sure that the loan makes sense. You want to make sure the loan will cost less each month and you’re not paying too much in interest and fees.
2. Your Credit Score
Your credit score is the biggest determining factor in your ability to get a loan at a good interest rate. As such, you want to know your credit score months before you applying for a loan. This way, if there are things on your report that need to be disputed, you can do that.
Ideally, you want to have a credit score in the "Good" to "Excellent" range, which can allow you to get the best interest rate. If you have a fair credit score, you can still get a good interest rate, but not as good as with an excellent credit score.
Does the interest rate make a big difference? You bet. Even a quarter of a point can mean hundreds or thousands of dollars in interest. What seems like a few dollars more in your monthly payment can add up over the life of the loan.
The bottom line is you want the best interest rate possible. You can get your credit report from resources like AnnualCreditReport, which is the free government website that allows you to pull your credit report at no charge once a year.
Review your report and see where you can make improvements. You want to make sure that you pay your debts on time and you pay down the balance as much as possible. Those are two things that impact your credit scores the most.
3. Your Budget
When you’re taking out a loan, you’re adding to your monthly payments. You want to make sure that you can afford to take on the loan.
For example, if you’re taking out a loan to finance and home renovation project or a vacation, you want to be able to make the monthly payments.
It’s easy to consider a personal loan as free money, but remember that you’re going to pay interest and fees on top of what you’re going to take out.
A loan can be an amazing financial tool, but you have to use it wisely and make sure it's within your budget, meaning not too expensive for you.
4. Terms of the Loan
Do you know what the terms of the loan are? The terms is basically the monthly payment, interest rate, and the life of the loan.
Terms are usually seen as $250/month over 36 months. While $250/month seems great right now, remember that you’re responsible to make that payment over the next three years. It also doesn’t tell you how much you’re going to pay in interest over the life of the loan.
For example, let’s say that you take out a $5000 loan paid back in three years. At 8% interest, you’ll pay about $640.00 over the life of the loan. At 12%, you can pay almost $1000 for the same loan.
Let’s say you extend that loan over 5 years or 60 months. That $5000 loan will have a lower monthly payment, but you’re going to pay about $1100 at 8% interest and over $1600 at 12% interest.
5. It’s OK to Shop Around for a Loan
Do you see why your credit score and your financial situation is so important to know before taking out a loan? It can be a huge advantage for you.
Different lenders will view your credit score differently and give you an interest rate according to your ability to pay the loan back. Some lenders will use only your credit score and income to determine the loan, while others like Bonsai Finance will have loans with no credit check.
That’s why you want to shop around for loans. You want to find the lender that will give you the loan that best suits your needs.
To recap, there are things you need to figure out to make sure a loan will help you accomplish your goals. You need to know your financial strength or situation, terms of the loan, why you want the loan, and shop around for a suitable loan for you.
Once you have those things checked, you’re well on your way to getting a loan that's best for you so you can improve your financial situation and accomplish your goals, whatever they may be.