Sometimes you may find that you need to apply for a loan. Before you apply for one, however, here are 10 things you should know.
1. Calculate what you can afford before you apply
All loans must be repaid, typically through a regular schedule such as on a monthly basis, and can last from a period of one year to multiple years. Because of this, it’s important to consider what you can afford before you apply for a loan. Check your existing finances and calculate what you would have to approximately pay on a monthly basis based on the interest rate, and then make your decision accordingly. You don’t want to end up paying a hefty interest monthly if you can’t afford it.
2. Make a plan for how to use the money you borrow
It’s also good practice to draw up an existing plan for how you’re going to use the money you borrow before you take out your loan. Don’t borrow money for the sake of borrowing: always make sure there’s a reason you need to take a loan. If you decide you need a loan, calculate and allocate the funds you need for the appropriate areas beforehand so that after you take out your loan, you know exactly what you’re going to do with the money.
3. Loans can be secured or unsecured
There are two kinds of loans: secured and unsecured. You should know the difference between the two before deciding on the kind of loan you want. Secured loans hold a specific asset as security, such as your accounts receivables in the case of business loans, meaning that if you can’t repay your loan on time, then the lender can claim this asset. On the other hand, unsecured loans don’t require anything as security. However, this isn’t to say that you can miss repayments or default on your unsecured loan: you can still be charged penalty fees or have it marked on your credit record.
4. Don’t apply for too many loans at once
Loan applications can show up on your credit history, so if you’re applying for many loans at the same time, it may end up worrying lenders and increase your chances of getting rejected for loans. The best thing to do is to conduct your research beforehand thoroughly and settle on a couple of lenders you are interested in, instead of mass-sending your applications.
5. Bigger loans have less interest
If repaying loans won’t be a huge issue for you, sometimes it can cost less money to borrow more. Although it ultimately depends on the company you’re borrowing from, typically, larger loans tend to have lower interest rates in comparison to a loan of a smaller size. It may therefore be more worthwhile to take the extra money from a larger loan and put it towards repayments given the lower interest rates.
6. Check your personal credit
When you apply for a loan, one of the most important things lenders are going to look at is your credit record. Even if you are applying for a business loan, your personal credit history will still be examined: this is because it’s an indicator of your ability and willingness to repay a loan. For example, if you have a history of defaulting on payments on a personal loan, then even if you are applying for a business loan, lenders may see that and reject your application as they may feel you are unable to repay or untrustworthy.
7. Check your business credit
Of course, if you are applying for a business loan, your business credit is also important. Unlike your personal credit, you can’t really determine what your business credit is like; however, there are paid services that can give you an overview of your business, including any outstanding judgements or liens, which you should resolve before applying for a loan.
8. Keep track of your bank statements
Apart from your personal and business credit profiles, your bank statements will also be important. Your bank statements, whether it’s for a personal or business loan, provides insight into your finances, and therefore helps lenders determine whether or not you’ll be able to pay back a loan, whether it’s a specific amount or at a particular rate or term. For example, if your bank statements show that you’ve been in the negative for some months, then it’s unlikely that you’ll be granted a loan. When lenders look at bank statements, they’ll typically look at the past few months, ranging from three to six months, but this can vary, so make sure you’re updated on the state of your bank account and have copies of statements from each month.
9. Know that you may not always get the advertised rates
Sometimes you may see a particular advertised rate online for a loan, but bear in mind that you may not always necessarily receive this rate. Lenders are required to provide this rate to at least 51% of their customers, meaning that you could potentially fall into the 49% that receives a higher rate. However, this will likely only happen if you are deemed to be higher risk: that is, you have bad credit history and will be charged more as a result.
10. Loans are the means to an end
It’s important to realise that loans are the means to an end, and not the end of your means. Don’t rely heavily on loans; instead, use your loan to establish your creditworthiness and as a way to grow so you can, for example, secure funds in the future.