It’s a big moment in everyone’s life—applying for that first large loan to make a major purchase. You may be feeling enthusiastic about what you’re planning to buy, but also a bit anxious about going through the application process and having lenders dig through your finances. Whether you’re looking into a short-term loan, or you’re getting ready for a 30 year mortgage, here are five tips that will make finding financing a smooth, simple process.
Figure out What Type of Loan You Need
There are all kinds of loans available, and each one comes with its own intricacies. You’ll want to be sure that you’re looking into the right type of loan for the purchase you intend to make.Some types of loan are self-explanatory, like a vehicle loan. You get one this type of loan to help you buy a vehicle, and they typically have relatively low rates because you’ll put the vehicle your buying up as collateral (don’t worry, more explanation of collateral is coming up in the next section). A business loan is another self-explanatory loan that entrepreneurs can take out to help them start a business.
Some loans are more complicated, like mortgages, lines of credit, and debt consolidation loans. A mortgage is a home loan, and since it is typically one of the largest loans a person will take out in their life it involves a lot of paperwork. Credit cards, lines of credit, and personal loans are all various types of loans involving unsecured debt, and typically have the highest interest rates. Debt consolidation loans are large loans you can take out to pay off all of the various loans and lines of credit you already have open. This lets you make a single payment each month instead of several, and can save you money.
Research How Loans Work
Financial literacy is one area where the U.S. education system leaves many people woefully underprepared. Depending on your prior life experiences, the finer points of loans may be a mystery to you. One of these points is collateral. Collateral is the financial term for any asset (or possession) that you put on the table as a guarantee to the lender that you will make your payments on time. In other words, if you default on a loan you have open then the lender can take your collateral for themselves. Defaulting on a loan means failing to pay it back, or failing to make payments on time.
Collateral can be frightening, since it means potentially losing something if you can’t make your payments. There’s a good side to having a loan with collateral though, which is lower interest rates. Having collateral on a loan gives the lender a sort of insurance that you won’t just take their money and never pay them back. It lowers the risk you present, which lets them charge you a lower interest rate without being afraid that they won’t make a profit. You can get a loan without collateral called “unsecured debt”, like a credit card or a personal loan, but these typically have much higher rates.
Before you start looking for loans, do some research on anything you don’t understand, and on loans in general. Sometimes there are fees other than interest that can be associated with loans, especially if you’re getting a mortgage or a debt consolidation loan. Failing to do your research about the loan you’re trying to apply for can be very costly – don’t let it happen to you!
Make Sure Your Finances Are in Good Shape
It’s impossible to overstate how important your financial stability is for getting a loan. Factors like your debt-to-income ratio, how good you are at making on-time payments for your other loan, and how much money you have in savings all play a role. The state of your finances determines whether the lender approves your loan application, as well as the interest rate you are offered upon approval. The three most important items are your credit score, your income and your debt-to-income ratio.
Your credit score is determined by three agencies, Equifax, TransUnion and Experian. These three businesses receive regular reports from all lenders across the nation about anyone and everyone who is borrowing money. There’s a lot that goes into this, and the way it’s calculated is actually a little different depending on what sort of loan you’re applying for. However, you can get a good idea of where you’re at by checking your FICO score. This score can be checked if you have a credit card from most major providers, or you can use a third party service like creditkarma. Above 700 is considered very good.
Debt-to-income ratio is fairly straightforward – how much debt you have compared to how much money you earn. To get the best loan terms, you should work on getting your credit score as high as possible. Income is important for determining how much a lender is willing to give you, but debt-to-income ratio is more important as far as how risky you are. As such, paying down existing debts is a great way to help yourself qualify for lower interest rates. If you’re purchasing a home or vehicle, it can also help to save up a high down payment. When your finances are in good shape, you present less risk to the lender.
Work with a Professional
There’s a lot of work that goes into applying for a large loan, and it can be a time-consuming process. The first thing you should do in order to make this process as easy and painless as possible is to talk with a professional loan officer or financial service. A professional like Southeast Financial or someone similar can go over your financial situation with you and help you decide what you want in a loan. No matter how much research you’ve done, a loan officer will always be better equipped to understand precisely how different types of lending will affect you.
Loans and credit are important parts of living in the world today. If you ever plan to buy a home or a newer vehicle, odds are you will need to take out a loan at some point. Hopefully these tips have made you a little more comfortable with the idea. Remember that it’s always a good idea to work with a pro when taking out a loan. Having financial experts working on your behalf could end up saving you quite a bit of money in the long run. Be patient when you’re comparing your loan options. It’s best to get started well in advance of when you need the loan, as this gives you plenty of time to find the right lender. Stick with it, and don’t rush into anything, and you’ll find the loan that’s right for you.