There are a lot of reasons to borrow money. Perhaps you’re trying to consolidate your debt. Perhaps you’re trying to buy a car. Perhaps you’re trying to send a kid to college. Maybe you’re facing some expensive home repairs. Maybe you’re trying to start a new or a side business. Whatever the reason, it is important to not just jump on the first loan you can find. There are a lot of different details to consider before taking out a loan.
What is Your Current Income?
How much money are you making now? If this loan is to help you start a business, the money you hope to make in your first few months don’t count. Look only at what you definitely have coming in now. Is it reliable? Will you still have this income in a few months? Will you be able to afford making, at the very least, the minimum payments on a loan without it throwing your budget into a tailspin? Will you still be able to save money while paying off this loan?
How Much Do You Need (and Do I Really Need It)?
The amount of money you need to borrow is also going to be a factor. There is a difference between needing a loan and simply not wanting to put a large dent in your savings or emergency fund. The amount of money you think you need to borrow will also play a role in what type of loan you try to get. For example, if you’re trying to send your child to college, you’ll want to start with federal loans because they have lower interest rates than private loans. If you’re taking out a debt consolidation loan, you’ll want to make sure you can pay off the debt before the terms of any special financing deals expire (like 0% interest for six months, etc.).
How Much Debt Are You Already Carrying?
Are you already swimming in debt? If so, this could classify you as a “high risk” applicant to many lenders. How much debt are you carrying compared to your income? As Southeast Financial points out in its blog post RV Financing Basics, “Most lenders that offer recreational financing will require that your debt to income ratio be less than 40%. You can calculate your DTI ratio by totaling up your monthly recurring debts (total of all of your monthly payments for installment loans and revolving loans), then divide that number by your monthly income.” It’s also important to understand that the loan you are attempting to borrow will be figured into your DTI.
What is Your Credit Score?
It is important that you know your credit score as well as exactly what is on your credit report before you start applying for loans. You’re allowed to get a free copy of your credit report from each of the credit reporting bureaus (Experian, Equifax and TransUnion) once every twelve months. Get a copy from each reporting bureau and go through it with the finest toothed comb you have. Report every error and make sure that all of the errors are removed before you start filling out loan applications. Your credit score and report won’t just determine whether or not you get approved for a loan; it can also sometimes be an important factor in your loan’s interest rate.
If your credit is bad, that doesn’t necessarily mean that you won’t get a loan. Just know that you probably won’t be able to borrow as much and the interest rate will be much higher than it would be if your credit was good. If you have bad credit and you do not need the loan right now, it’s worth taking some time to build some good credit before you begin the application process.
Who Are the Best Lenders in Your Area?
Often the type of loan you need will play a large role in from whom you borrow the money. Even so, you are going to have some options available. Start investigating those potential lenders before you fill out applications. Check out their scores with the Better Business Bureau. Look into their reputations. Ask friends who have borrowed money what kind of experience they’ve had with specific lenders. Do your due diligence to ensure you won’t get taken for a ride.
There are a lot of things to think about before you start applying for financing. These are the big details you need to consider. What are some of the things you weighed before you took out your last loan.