Loans are a very helpful way of borrowing money that you need quickly, but not everyone can simply apply and attain any loan they choose. If you are in a position that you have decided you need a loan, whether it is to pay off a debt, help in purchasing a car or even a house, then there are a few things you should know before applying.
Credit score and credit history
The first thing that lenders will take a look at is your credit score and credit history. This will show lenders that you are able to pay your debts and do so on time. The higher your credit, the better chance you have at securing a loan with the lowest interest rate possible. Although 1-2 percent may not seem like a huge difference in interest rates this could actually mean a difference of thousands of dollars.
Every time you apply for a loan it is a credit inquiry which, if done too many times and too often, can lower your credit score. This means that before applying for a loan you need to know your credit score. Use a free site to check your score. Be sure to wait on applying for a loan and take some time to improve your score if it is less than favorable.
This is another aspect that will be examined when you are applying for a loan as this determines what monthly payment you are able to afford. You will need to show proof of your income included in your application which might include pay stubs, W-2 forms, a salary letter from your employer, or tax returns from the past two years as well as invoices and receipts if you are self-employed. Your income is also something you will want to know for yourself so you do not enter into a loan that you cannot afford.
Similar to knowing and understanding what you can afford based upon your income, you should also calculate your monthly expenses and payment obligations. For example, consider your monthly income is $5,000 per month, but spend $2,500 for rent, $1000 on groceries, $800 on child support and $500 to other bills. This would leave you with only $200 to pay for any type of loan and may not realistically allow you to afford a loan that you are looking for.
When applying for a loan your prospective lender might not only look at your income but also your assets and liabilities which determine your net worth. Your assets are the things that you personally own, while your liabilities are financial obligations such as a pre-existing loan. Especially since the loan that you are applying for will become a new liability, it is important for you to understand your net worth, and keep your finances managed.
Although you might think you are receiving a great offer off the bat, you should always listen to multiple offers before deciding on a loan. Shop around and make sure you are getting the best interest rate possible. Remember, this loan is going to be in your life for at least a few years and can affect the rest of your life if not managed properly.