Getting a loan can be a bit of a difficult prospect, so knowing how to do so can be a great help further on in life. Knowing that though, how does one to go about obtaining a loan? What do you need to know in order to avoid getting suckered? LoanMart has the answers to all those questions and more below.
Getting a Loan: Credit History
When going in to get a loan, a lender is going to be looking through some criteria to ensure that you’ll be able to repay the money they’re lending you. Credit history is generally the first criteria that you’ll be evaluated on, and often one of the most influential criteria.
Your credit history keeps track of how reliable you are at repaying credit card debts. Having a good credit score means that you’ve consistently repaid the full amount of your debts on time. The status of all your credit accounts factor into this, as well as the opening and closing of any accounts. Depending on the strength of your credit score, the terms of your loan can change. You could end up receiving a lower interest rate on your loan or it could require a lower monthly rate.
When going in to get a loan, make sure to find out your credit score beforehand in order to get an idea of what kind of rate you’ll be looking for. You often have to pay to find your exact credit score, but you can get an estimate here. Your credit score usually sits in a range of 300 to 850, with 850 being the maximum and best score. Generally though, below 620 your credit score is considered subpar, and above 760 it’s considered great. Knowing your credit score and where you fall on the chart can give you an idea for what kinds of loans you’ll be eligible to receive.
Getting a Loan: Capacity
At first, capacity may sound rather similar to your credit history: it’s another criteria by which lenders keep track of your ability to repay debts. However, instead of being a measure of your credit card payments, it measures your overall debt level and how doable it would be for you to take on the new potential loan’s debt.
This criteria will match your monthly income against your monthly debt level, and figure out the difference between them. They’ll take all your different monthly bills, like your electricity bill, rent, and other loans, into account, and see what percentage of your monthly income is required to pay off all those bills. This is known as the debt-to-income level, and you can figure out what your DTI score would be here.
Your DTI score will be a percentage, illustrating the percent of your income your debt takes up. If you end up at a 50% or more mark, your debt is towards the worse end of the spectrum, and you’ll be less likely to be able to land the loan. If you’re at 35% or better, your chances for the loan increase. A score of 50% or lower doesn’t mean you’re out of lucky though. Sometimes you’ll get a loan regardless of this score, but the amount you’re allowed to borrow will usually be much lower than if you had a better score.
Getting a Loan: Collateral and Capital
When getting a loan, usually the lenders want to have some insurance for their investment. No one’s perfect, and sometimes the borrowers can’t repay the amount they borrowed. So when a borrower is going in on a loan from the lender, sometimes lenders will require something from the borrower as well.
Collateral is a possession of the borrower that both parties agree with go to the lender if for any reason the borrower falls through on their end of the deal. This can take many forms: a house, a vehicle, anything of value that the borrower owns. Offering up something as collateral often can result in bonuses for the borrower, like loans with lower interest rates. Of course, if you’re going to offer collateral, be absolutely sure you can pay the debt back properly. Otherwise, that collateral becomes property of the lender.
Similar to collateral, capital is the amount of potential money sources you could potentially part with if you don’t manage to pay back the loan. Things like a savings account, retirement fund, and other similar things. If a lost job prevents the borrower from finishing up their payment, then those extraneous funds can be dipped into to finish the rest of the loan. Knowing that these options exist can make a lender more likely to agree to a loan.
Getting a Loan: Conditions
Finally, the lender will want to know how you plan to use their funds and the circumstances in which it will be used. For example, a lender might be less likely to give you a home loan if you’re going to build a house near a volcano. If you’re planning on using their loan for something they’d rather you not use it for, they can also rescind the loan for that reason. Finally, the state of the economy can affect your chances of receiving a loan. If the economy is in a downswing, don’t expect many people to be ready and willing to part with their funds so easily.
Getting a loan can be a great way to help make an otherwise difficult large purchase go much smoother, and knowing your way around loan-obtaining will in turn make that process smoother too. Get all your criteria in order before going to obtain a loan, and you should have no problem getting the funds for the project you need.