Getting any loan is serious business, so you need to be sure you’re getting the right loan for yourself.
If you get the wrong loan, you’re going to waste time and money by paying back a loan you never wanted in the first place. In worst-case scenarios, you may pick a loan that you can’t pay back properly, causing further complications.
In this short guide, we’ve covered some of the things that everybody should have covered before they begin the loan application process. By following the points below, you’ll figure out how to find your ideal loan type and whether your credit score is good enough. These should help you with choosing a loan.
The first thing you need to know is the type of loan you need. There are too many specific loans to list but there are general loan categories that can help you out. The three main things you should know are whether the loan is secured or unsecured and whether there are conditions on how you spend it.
Secured and unsecured loans are simple enough. Secured loans are where the lender is offered security against the debt, such as a car or even your home. This means that the lender can repossess those assets if you can’t pay back your loan. By putting your property on the line like this, it is essentially a promise to the lender that you will pay them back, whether that’s in cash or assets.
Unsecured loans are personal loans that have no security stipulation. You don’t need to put your property on the line, though you can expect worse rates than secured loans. That said, many advise getting an unsecured loan if it’s possible over a secured loan.
Lastly, some loans have restrictions on what you can spend them on. This is common in the world of business loans, where the financing needs to be spent on your business. For example, you can’t get a loan to fund the sourcing of equipment for your business and then blow it all on a new mattress. Check for these restrictions before trying to get a loan, especially if you want to have freedom in how you spend it.
One of the main things that determine if you get granted a loan is your credit score. This is a quantified figure that lets banks and other lenders know how credible you are in the financial world. If you pay back loans on time and practice other good financial behaviors, your credit score will increase and you’ll be more trustworthy. Conversely, your score will suffer if you miss repayment periods and lenders will be less trusting of you. In those cases, you’ll be offered less and the lender will ask for guarantees and securities that make sure you pay them back, like those secured loans we’ve mentioned.
The higher your credit score, the better loans you can get. You can compete more when trying to get a loan and they’ll often have more favorable repayment terms, interest rates, and funding amounts.
It’s common sense that you should be able to pay your loans before you take them. However, you need to be realistic with yourself when doing this. Consider the timeframe of your loan carefully, figuring out the minimum and maximum periods you expect to keep the loan. Have a plan and stick to it.
For those inexperienced with loans, a common pitfall is to focus only on the flat repayment of the loan or the monthly payments. You’re already considering the types of loans you should get, so you’re already a step ahead, but you should also consider the risk that you’re taking on. This means you need to factor in the interest rates and the total cost of the loan. You should be especially sure that you can pay the loan if it’s secured against assets that you own.
Don’t focus only on monthly payments. A loan may have a lower monthly payment but, when all is said and done, it may cost you even more than other loans. Don’t get greedy, either. You should only lend what you need. It may seem great to get more cash than you need, especially when the terms are favorable, but you still need to pay that money back. Take on less risk and make it easier to clear your debt.
Disclaimer: This is a sponsored article in collaboration with Credit Ninja. The information we publish has been obtained from or is based on sources that we believe to be accurate and complete. If you are unsure of any investment decision you should seek a professional financial advisor.