Loans can be intimidating, especially if it’s your first time taking out a big one. However, the truth is that loans aren’t as complicated as you might think. Whether you’re looking into applying for a student loan, business loan, a USDA or FHA loan for financing your mortgage, or any other type of common loan, answering certain questions can make the application process simpler and easier across the board. Here are some of the most crucial questions you need to ask in your quest to find the best loan terms possible.
Do you really need to borrow money?
How much do you really need to take out a loan? If it’s for something that’s more of a want than a need, forget about it. Wants and desires tend to expand with your current level of wealth, so it’s likely not a smart financial decision to borrow money for something that you can technically do without. While there are many ways to manage debt, the best option is always to avoid it as best you can. However, if you need to take out a loan for something truly important to your life such as studies, career, or personal growth, then keep reading.
Can you do with a cheaper option?
More often than not, there’s a less expensive version of whatever you need to borrow money for. The Balance advises reassessing whether there’s a cheaper option, which can either lessen the amount you need to borrow, or eliminate the need to borrow completely. While mortgaging a home in your dream neighborhood seems nice, what about your back-up options in cheaper neighborhoods that are just as nice? Instead of a brand new car, perhaps there’s something in the used or secondhand markets that can do the job just as well. While the cheaper option might still entail borrowing money, it can at least lessen your future financial obligations.
What’s the APR?
The annual percentage rate (APR) shouldn’t be confused with the interest rate. The interest rate is a measure of the amount of interest that’s due per period. Meanwhile, the APR is a combination of interest figures as well as all other annual fees associated with the loan. In short, the APR is a greater measure of how much a loan will cost you in the long run, and just like with interest rates, the loans with the lowest APRs tend to be the best options. Marcus detail how APRs for personal loans can range from 10% to 28%, but that only the most creditworthy applicants qualify for the lowest rates — a rule that applies for most, if not all lenders. This is why it’s crucial to keep an eye on the current state of your credit, which brings us to the next question.
What’s your credit score?
When lenders check your credit score to vet whether or not you’re eligible for a loan that triggers a hard inquiry that can temporarily lower your credit score. However, if you check it yourself, which is free to do every 12 months, your score won’t be affected, as that only constitutes a soft inquiry. Knowing your credit score before applying for loans can help you to assess which loan options are actually viable based on the current state of your credit. Furthermore, it’s also important to keep track of any changes the FICO and other major credit bureaus have made in terms of credit score calculations. Based on these changes and your most recent financial activities, individual credit scores tend to fluctuate, and you should always be aware of the factors that can prompt or affect this fluctuation.
Can you afford to make payments on time?
“If you miss payments, you’ll be in a world of hurt. Among other problems, your credit score will suffer big time and that will make it harder and more expensive to borrow money in the future,” details Credit Pilgrim chief editor Neal Frankle. Avoid all this by finding out whether or not you can actually afford to make payments for the loan you’re considering.
While these aren’t the only questions you need to ask before borrowing money, they’re the ones that apply to almost all types of loans across the board. Before you fill out any applications, take a step back and try to answer these questions as best as you can.
Guest Post by A. Criss
After finally ridding herself of debt, A. Criss took to teaching others of her ways. In the midst of writing her first book, she also aims to share her tips with readers online. You can often find her jogging or reading when she’s not writing.