By Stewart McClure, Regional President
If you find yourself in need of funds for an upcoming expense and your income can accommodate a one-time payment, a loan that allows you to pay over time may be the solution. But before you sign on the dotted line, there are important steps to take to ensure you don’t put yourself in a financially vulnerable situation.
It’s best to start this process with some due diligence. Research or seek advice on the different types of loans that are available. There are many varieties of loans to consider based on your specific financial needs. Some financing options include mortgages
, home equity lending
, car loans, student loans
, and more. The question is which one is the right loan for you.
The first thing you need to do is evaluate your financial situation and here are questions to ask yourself before you make a loan commitment.
1.) How is my credit?
Everyone should know their credit or FICO® score. Your score will tell lenders your credit worthiness, and affect their decision to grant you a loan. It indicates how well you pay your bills, the amount you owe, length of credit history, new credit and types of credit used. Credit scores can change from good to bad, bad to good and good to great. Make monitoring your credit a priority. Typically, the better your credit score the lower your interest rate on a loan which can help save you money in the long run.
2.) What are my options for loan types; unsecured versus a secured?
Simply stated, an unsecured loan does not have a collateral requirement (which is something of worth that you pledge as insurance for the lender, e.g., house, stocks or bonds), but the interest rate is higher than a secured loan. A secured loan requires the borrower to put up collateral or pledge assets to protect the lender, like a 20% down payment. And for that promise the borrower may get better repayment terms, a lower loan fee and interest rate. Examples of secured loans include mortgages and car loans, and examples of unsecured loans are personal or education.
3.) How much money do I need to borrow?
You should know the amount you want to borrow and where you plan to spend it before you visit your banker. Create a budget flow chart to help you determine the amount of money coming in and the amount of money you pay out monthly. You can use financial calculators to help you set a realistic budget.
4.) What is the application process?
The application process differs depending on the type of loan. Some loan decisions are made based on your FICO and income only, but others require more details including: financial statements, credit history, tax returns, and bank statements. Read the loan applications you are considering and make sure you have all of the documentation you need to apply.
5.) Will there be a fee?
Some lenders charge a loan origination or application fee, and these will differ from bank-to-bank. It will benefit you to be armed with this information so that you can shop around for the best deal.
6.) What is the rate of interest?
This is the fee charged for the use of the money you are borrowing. The APR (annual percentage rate) is stated in the lender’s loan terms and is the amount you will pay back in total. You can see an example of our loan terms and rates, here. Note that secured loans typically have lower interest rates than unsecured loans and credit cards. Loans and lines secured by real estate usually have one of the lowest interest rates. And, loans secured by liquid collateral, such as a CD, may have even a lower interest rate.
7.) How long do I have to repay the loan?
This depends on the type of loan. Keep in mind the shorter the repayment period, the higher your monthly payments will be because you have a shorter period of time to pay off the loan. A longer repayment schedule will allow you lower payments, but results in more interest and a higher loan cost in the end.
8.) Is there a penalty for early repayment of the loan?
Some lenders charge a fee if you pay off the loan early. Be sure to ask about any early repayment penalties.
9.) Are there spending restrictions on loans?
Funds received from certain loans can only be used for specific expenses. For example, mortgages are for buying a home, car loans for an automobile purchase, and tuition for education. Personal loans can be used for nearly anything, but you should understand the lender’s loan restrictions.
10.) What are the consequences for not repaying on time?
Paying loans on time is important for building a positive credit history and for your FICO score. You should understand the ramifications for late payments and non-payment in the event you are faced with the inability to repay the debt.
Being informed is crucial when taking on debt. Talk with your accountant, financial advisor or banker to help you make the best decision for your borrowing situation, but also do some research on your own.