What is the Process for Getting a Loan? What are the Successes and Pitfalls to Be Aware Of?

Men and women may find they are short on cash and need to take out a loan to cover expenses.

They might be in this situation because an emergency came up and they didn't have the funds to cover it. At times, they need a loan to cover a major purchase, such as a house or car. Regardless of why they are considering this option, they need to ensure they choose the right loan provider. What should a person know when taking out a loan for any reason? 

Types of Loans

First, a consumer must know the different types of loans and the benefits and drawbacks of each. For instance, a person doesn't get a payday loan when they want to buy a house, and they wouldn't take out a mortgage to cover a car repair. Read the following tips for taking out a loan and ask questions if there is something you don't understand. An informed consumer finds it easy to determine which loan they should get and why. 

Payday loans offer cash fast, often in 24 hours or less, which many individuals need. People often refer to these loans as cash advances because the lender is advancing them cash which must be paid off with the borrower's next paycheck. The main drawback with these loans is the high interest rate, one which can reach the triple digits. The Consumer Financial Protection Bureau advises borrowers not to take out this type of loan unless all other options have been exhausted. However, individuals with bad credit often find this option meets their needs in every way. 

Credit card cash advances serve as one of the most costly ways to borrow cash today. When a consumer takes an advance, the credit card issuer charges a transaction fee, which typically ranges anywhere from three to five percent of the advance amount. The rate for cash advances is higher than seen with purchases on the credit card, according to Bankrate. While this option does serve as a better choice than a payday loan, borrowers should consider using a balance transfer option if available. Another option involves contacting the card issuer to request a credit line increase or ask if one or more payments can be skipped. 

Personal or unsecured loans remain a popular option with borrowers. These loans come with no collateral requirement and have a lower interest rate than payday loans and credit card cash advances. Borrowers know exactly how much their payment will be each month and when the loan will be paid in full if all payments are made as agreed. A person with good credit will find they can secure a personal loan with a favorable interest rate, although the rate will be higher than the rate seen with a secured loan. 

Secured loans, such as a home equity line of credit, tend to come with the lowest interest rate. The lender requires collateral with this type of loan. As they can take possession of the collateral if the borrower doesn't pay as agreed, they take on less risk. This is why they offer a lower interest rate. However, borrowers must recognize they could lose their house, their vehicle, or whatever asset they use as collateral for this type of loan. They must decide whether they are willing to take on the risk before borrowing the funds. 

Securing a Loan

Before applying for a loan, a borrower must take certain steps. Overlooking a single step can lead to the borrower paying more than they must for securing the funds they require. What are these steps? 

• Check your credit score
• Determine how much you need to borrow
• Compare rates and products
• Read the fine print
• Apply

Before borrowing money, a person must know their credit score. This score has a significant impact on the interest rate they will be charged. The higher the credit score, the less the borrower will pay in interest over the life of the loan. Several sites now offer free credit scores, so check these sites first. If you cannot find a site that offers a free score, pay to get this information. This provides you with information that will be of help as you move forward with the process. 

Borrowers should never take out a loan for more money than they need. The funds aren't free, so less is better in this situation. Lower amounts mean you pay less interest over the life of the loan. Furthermore, the loan payment will be more affordable each month. You don't want to find borrowing the funds to resolve one financial crisis has created a completely new one. 

Compare rates for different financial products to see which best meets your needs. As mentioned previously, secured loans come with the lowest rates. However, the rates vary by lender, and a person can save large amounts of cash by shopping around. Fortunately, the internet offers comparison tools, so borrowers can compare lenders quickly and easily. However, follow up by visiting the site of each provider you think you may use. This ensures you have accurate information before proceeding. 

Never sign a loan agreement without reading the fine print. Look for clauses that address things such as prepayment penalties, late fees, and application fees. These things are often hidden in the fine print and can significantly add to the overall cost of the loan. Other fees to look for include annual fees, origination fees, and processing fees. Ask the lender if these fees may be paid in advance or if they must be rolled into the loan. Pay them in advance when possible to reduce the total interest paid and the monthly payment. 

Apply for the loan. Make certain you have all information needed to complete the process easily available. This will likely include proof of your identity, verification of your address, and proof of income. Each lender determines which documents are required for a loan, so ask for this information before you begin the application process. Having everything on hand makes the application process move smoothly. 

Loans become of great help when you find yourself short on cash. However, choose your financial product carefully. Doing so ensures you get the funds you need without damaging your financial future. If you cannot find a loan that will help you in the short and long run, it's best to consider other options.