Things Everyone Should Do Before They Take Out A Loan

Determine your financial goals

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One of the first things you should do is figure out why you need the loan and how it fits in with your overall financial goals. We’ve all been there, where we’ve seen our dream car go on sale, or are just desperate to get that holiday booked months in advance. But, ask yourself, is this something your really need? If not, then you might as well wait until you’ve saved up.

Check your credit score and history

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One of the most important things that creditors will check is your credit history. This is the only thing that’s going to show that you’re good at repaying your debts! Checking it can help you get a better understanding of your creditworthiness, which is important since it may influence the conditions of any loans you take out. If you’re credit score is the highest, it doesn’t necessarily mean that’s good, it could come down to a lack of credit history.

Make a budget to stick to

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Ultimately, we all need to be somewhat financially responsible, especially if we’re considering taking out a big loan, that’ll require some hefty repayments. To keep track of your present and prospective future loan payments, create a budget that is both detailed and thorough. This way, you’ll be able to properly determine whether or not this loan is something you can feasibly afford.

Decide how much you actually need

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One of the biggest things to consider when taking out a loan is to think about how much you actually need to borrow. It can be tempting to take a little bit more, just for a bit of spare cash, but beware! To keep your interest payments as low as possible, limit your borrowing to only what you need. Otherwise, you’ll end up paying more in interest than you need to.

Do your research!

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One of the biggest mistakes people make when taking out loans is neglecting to do their research. There are thousands of horror stories about how people have taken out loans without completely understanding the terms and repercussions. We’d highly recommend conducting research on various types of loans, such as personal loans, mortgages, or vehicle loans.

Compare different creditors

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Please, please, please don’t just go for the first loan provider you see. It’s a massive rookie mistake, and has been done time and time again! When looking for a loan, do some comparison shopping for different interest rates, fees, and terms. There are hundreds of sites out there where you can compare loan providers, and some will even go off of a soft credit check to give you a tailored response.

Understand the interest rates

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One thing to note when taking out a loan is that every single one comes with an interest rate. This is basically the rate it which you’ll overpay your loan, basically, the longer your loan goes on for, the more of it you pay. You should recognize the distinction between fixed and variable interest rates, as well as the effect each kind of rate has on your monthly payments.

Always read your loan agreement carefully

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You should read all loan paperwork, including the terms and conditions, very carefully. Numerous people every day find themselves in trouble due to unfavorable loan agreement clauses, such as exorbitant late fees, harsh penalties for changing information, and even enormous fees for early loan repayment. It sounds impossible, but these things do happen.

Work out the total cost of the loan

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This step requires you to compute the overall cost of the loan, taking into account interest and other associated expenses. This is especially important as one loan over one year with an interest rate of 30%, might work out being much cheaper than one loan over five years with an interest rate of 15%. It all comes down to how they market it to you, so make sure you understand fully.

Check for early payment fees

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It hardly seems likely that creditors will actually charge people for repaying their own debt back early, but you’ll be surprised. Most high street lenders will have some form of early repayment fees attached to them, so just be careful. It’s so important to check to see if there are any fees associated with paying off the loan early. Everything costs money, don’t be naive to it.

Decide whether you’ll need collateral

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If you don’t know what collateral is, it’s basically insurance for the creditor that if you default on the loan, they’ll get there money back one way or another. While not all loan providers will be pressy about it, certain loans call for the provision of collateral. You should familiarize yourself with these terms and what they mean for you; it’s very risky to put your family home down as collateral.

Decide how long you need the loan to be

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This one is a tricky one. You should spend some time before taking out your loan to determine the length of the loan. If you are doing this, you should also consider how it will affect your monthly payments. It’s so tempting for people to take out a loan over more years than they need to, purely because it keeps the monthly repayments lower, yet you actually end up paying more in the long run.

Determine whether you can afford it, and can continue to afford it

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One of the things people neglect to think about is that if something were to happen, could they continue to afford repaying the loan. That’s why you should examine your level of income and the stability of your employment to determine whether or not you can fulfill your duty to make repayments. Failure to do so might land you in some hot water, and can even lead to bankruptcy.

Prepare yourself for the unexpected

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If you want to avoid relying on loans in the future, you should think about starting an emergency fund. Not enough people know to start saving money, and instead, it seems we live in a society where we should start spending money before we even have it, which is a bad trait. You never know when something’s going to happen in the future, and a faulty roof might just be the difference between you making your loan repayment, and missing it.

Think about your current debts

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It’s safe to say that pretty much all of us in this day and age have debts to think about. Heck, some of us constantly live in debt, with bank balances in the minus. That’s why you should definitely consider your existing debt load and how it may affect your capacity to borrow more. Some lenders might look at your current debt load and reject your loan application

Do your research on the lender

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It’s easy to just go with a lender because they have a cute photo of a puppy on their website, but you need to be a bit more cautious and realistic. Conducting research on lenders helps to verify the lender's reputation. All you need to do is do a Google search on previous customer’s reviews and ratings. Any lender that includes unnecessary and harmful clauses, or doesn’t have good customer service, is probably one to avoid.

Question everything

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One thing to mentioned is that you shouldn’t be afraid to ask the lender any questions you may have about the terms and conditions of the loan. After all, these are your terms and conditions, and it’ll be you suffering the consequences of them if you default on the loan. You definitely don’t want to get hit with any nasty clauses in the future, so always read these through thoroughly yourself beforehand.

Investigate Government Programs

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Some people don’t realize it, but there are some Government-funded Programs out there that can provide people with some financial security. An option to consider is looking into government-backed lending programs, which might provide more favorable conditions. These are often a little bit kinder on your repayments and terms, emphasis on the “little bit”.

If you’re unsure, consult a financial adviser

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One of the biggest mistakes made is that some people don’t even look at financial advisers and think that they can do it all themselves. If you want to determine which loan approach will work best for your circumstances, you should seek the advice of a financial expert. These people can often work on an hourly rate, and the little expense at the beginning might save you thousands in the end.

Examine your savings

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One way to reduce the amount of money you need to borrow is to first look at how much money you have saved up. Don’t be afraid to use some of it if you need to. It goes without saying that you should leave some aside for emergencies, but if you have a hefty chunk of cash just sitting there, then you might as well use it rather than rack up thousands in interest debt.

Prepare yourself to submit the application

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There’s more to applying for a loan than people think. You should collect all of the information and paperwork that is required in order to simplify the process of applying for a loan. If a lender ends up rejecting your loan, then that might just end up reducing your credit score, affecting your eligibility for future loans. That’s why you should have everything you need ready.

Think about getting a co-signer

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If your credit is poor, getting a co-signer who has strong credit may help you get a lower interest rate on a loan. It might be difficult to get someone to put down their name as a co-signer, as they’ll be somewhat responsible for also repaying the loan, however, if you have someone you trust, definitely try to get them on board. It might save you thousands in interest!

Plan for future expenses

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Make a plan for future expenses by anticipating incoming financial requirements and determining how the loan will fit into your future finances. It’s easy to think that you can afford to start repaying a loan now, but you’re mortgage repayments might be going up from next year, or maybe your purchase-free period on a credit card is about to expire. Think everything through.

Consider loan insurance

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Determine whether or not you need loan insurance and how the cost of the insurance impacts your overall loan expenses. Not everyone needs to take out loan insurance, and it’s pretty much for those bigger loans, like mortgages or business loans. Some people opt to get loan insurance for peace of mind, and because it dramatically helps in case of emergency.

Discuss and barter the terms

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Don't be afraid to discuss the terms of the loan with the lender, including the interest rate and any fees. Not all lenders will budge from their spots, though, especially the high-street lenders who have a pretty regimented lending procedure. However, some smaller firms might have a little bit of wiggle room, and give you a bit more freedom to barter the terms down.

Refresh your memory of the grace period

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You should be aware of whether or not there is a grace period before the beginning of the payback term. A grace period is essentially the period in which you can return the loan in full and cancel any obligations you have with the lender. While we don’t always want to us them, it helps in case you change your mind, or if something you were about to purchase is no longer on offer.

Make sure you know the costs

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Make sure you are aware of any costs that may be associated with the processing or origination of the loan. Some people don’t take these costs into account, but they often are there, especially for bigger loans that have taken quite a lot more work from the lender. These costs should be incorporated into your budget to see if you can feasibly afford the loan.

Examine the repayment schedule

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One of the most important things people forget to do is to look at the repayment schedule. You should definitely make sure you do this in order to get an understanding of the distribution of payments made toward the principle and the interest. Some people don’t realize this, but often a lot of the loan repayments can actually just be going towards the interest repayments rather than the capital.

Prepare for any change

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Take into account the possibility that your life may undergo changes in the future that may have an impact on your capacity to make repayments, such as the loss of a job or an illness. We always need to prepare for any eventuality, so you should definitely think about whether you could afford to carry on if anything were to happen. After all, you don’t want to default on the loan.

Consult an attorney if you need to

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If the loan arrangement is complicated or if you are unclear about the terms, you should seek the advice of an attorney. This is definitely a piece of advice for anyone that’s taking out a business loan, or a mortgage, as these can be pretty expensive mistakes if anything is overlooked. An attorney will be able to better help you understand the terms and rates of the loan.