Loan applications have now become easier and simpler than ever. All it takes is a quick phone call or a few taps on your smartphone, and you can have your loan approved in no time.
But even with this convenience, there are a few matters you should double-check first before you send in your application. Credit score statistics say that these factors can make or break your chances of approval. Depending on how you approach it, they can also change your life for the better or the worse.
Read on below to know the most important things you need to consider before taking out a loan.
- Consider If You Need A Loan Or Not
No matter what your reasons are why you want to take personal loans, don’t let those telemarketers and loan advertisements fool you into thinking that borrowing money is as easy as 1-2-3. They’ll show off simple application processes and low-interest rates, all of which are aimed to tempt you to get your hands on cash that you can use for anything and everything you want.
But before you give in to the temptations, stop first and think. Do you need a loan in the first place? The moment you take out a loan, you also need to pay back the interest on top of the amount of money you borrowed. This interest could have been spent on other things or set aside for savings.
Always consider your purpose for taking out a loan. Will you borrow money for essential needs like education, or do you just need it to pay for a non-essential item like a brand-new phone or a luxurious vacation?
For example, you want to take out a personal loan worth USD$30,000 with an annual interest rate of 15% repayable on a monthly basis for two years. The interest for the loan will be worth USD$4,590. If you don’t take out this loan, you can use this amount of interest for other essential needs.
This is the reason why borrowing money isn’t always your best option. With careful and proper planning, you can look for other ways to pay for things you need or want. You can save in advance, for instance, if you have always wanted to go on a holiday getaway. You can set aside some cash every month until you save enough to cover your expected expenses.
- Consider If You Can Repay The Loan
You need to determine a budget first and list down all of your debt, savings, and monthly expenses in detail before you decide to take out a loan. Use this list as your guide to know whether you can afford to make payments for your loan every month.
Also, even if you think you can repay the loan, avoid borrowing more than what you need in the first place. Choose the payment terms that’d suit your current situation. You should also try paying back the loan as soon as you can. Remember, you’ll end up paying more interest if it also takes you longer to repay the loan.
- Consider The Reputation Of The Loan Provider
Did you receive a phone call promoting loan applications that don’t require any fee for unsuccessful cases or loans with incredibly low-interest rates? Offers of these kinds should always be approached with extreme caution. Just so you know, these are some of the tricks often used in loan intermediary scams and other fraudulent activities.
Don’t fall into these traps if you don’t want to become prey to these notorious predators. If the person claims to represent or work for a certain financial company, bank, or even the government, make sure you get in touch with the said institution to confirm their authenticity.
Mortgage companies or banks will never ask their clients to repay existing loans or borrow money from a different finance company. Don’t give your money to any intermediaries.
If you truly need a loan, always apply for one with a reputable and reliable financial institution or bank. See to it that you compare terms, conditions, and rates before you make your final decision.
- Consider The Annual Percentage Rate (APR) Of The Loan
Before taking out a loan, you should know how personal loans work. For instance, interest rates are calculated in different ways. These include annual rates or monthly flat rates for personal installment loans and monthly compound rates for outstanding balances in credit cards. You might also need to pay other fees like annual charges and handling fees. Before you take out and agree to a certain loan, all the interest rates and relevant fees should be taken into consideration as well.
The APR is the annual interest rate you need to pay on a loan. It’s essential to know and understand the terms and rates of the APR. This way, you can set your budget, use your loan wisely, and ensure that you consistently pay for both the interest and the principal loan balance.
- Consider The Consequences Of Late Payments Or Nonpayment
Aside from handling fees or additional interest, making late payments or failure to pay back the loan can also affect your credit report. Once your credit report takes the hit, you might have a difficult time getting approved for mortgages or loans in the future. A less than stellar credit history can also have an impact on your professional career and opportunities for promotion in certain industries and fields like the financial sectors, armed or police forces, and regulatory bodies.
Excessive borrowing can have some dire consequences on your personal finances and lead to stress. Once borrowing money becomes a habit or if you always take out new loans just to cover your existing debts, you might have a hard time managing your financial situation.
Sooner or later, things can go out of your control. Debt problems have been revealed to be the leading cause behind bankruptcies and even unfortunate tragedies among families all over the world.
Taking out loans isn’t necessarily bad, especially if it helps you improve your life and not make it worse. Think seriously and don’t forget to consider the things above before you sign that loan application.