Each year millions of Americans take out loans to try and consolidate debt, start a business, cover unforeseen costs, ever to tackle home improvements. While loans are not the hardest thing to acquire they shouldn’t be taken out lightly.
Some have very costly repayments and if you fail to pay the minimum repayment you can get into quite a spot of trouble. There are a quite few important things you need to know before taking out a loan and we’ve put 6 of the most important into a list below.
1. You Need a Good Understanding of the Application Process
In order to take out a loan you will need to apply for one from a lender. According to hard money lenders found in Tampa, FL, there are a variety of different sorts of lenders out there. Once you choose who you want to borrow from, you will typically need to fill out a loan application and provide proof of identity, your personal address and you will need to provide income statements. Lender might also ask for additional documentation. This is completely normal and not something that should make you feel anxious or as if they are going to reject your application. They might request things such as pay stubs, tax returns, bank statements, your driver’s license, utility bills, mortgage statements, etc.
It might sound like a lot of information, but it is just to build a profile of how much you can afford to take out as well as what sort of interest rate you will be granted to repay the loan. Different loans require different pieces of information from you which means that some take much longer than others to approve. For example, personal loans are usually approved very quickly, but they are typically for much lower amounts of money. They require far less paperwork than applying for or refinancing a mortgage. Some personal loans can even be approved in a matter of minutes. The type of loan you apply for and the amount of time it takes to get approval is dependant on how much you need and how quickly you need it.
2. Consider All of the Options
As we eluded to above it is important to apply for the right type of loan for you and your personal needs. Looking into things like credit cards, or equity financing in addition to taking a loan from a lender. Exploring all of the avenues ensures that you find the best deal possible for you. Don’t just take the first deal you find. You could find that repayment and interest rates on other options could be a lot lower than the loan you were looking at.
For example, before you decide to take out a personal loan to repay some of your debt, look into a debt management plan. These are especially attractive when your credit score isn’t as good as you’d like for it to be. Be sure to find one that is from a reputable nonprofit credit counsellor.
3. Look For The Best Rates
According to the professionals, online lending institutions often offer some of the best rates. This doesn’t mean that you should exclude credit unions and things like traditional banks. Rates are constantly changing, and everyone offers something different. Be sure to read the terms and find a deal that suits your needs as well as your pocket.
Something else that people like to do is prequalify with a lender before they submit an application. This is because it won’t negatively affect your credit score and you’ll get a ball park idea of how much you can take out in a loan. This way you can shop around risk free with a bunch of lenders before making a well-informed and final decision.
4. Be Aware of Hidden Fees
Hidden costs are the bane of our existence, but somehow always manage to pop up. You need to look at the rates you will be changed, as well as the additional fees you could be expected to pay in. One such fee is the origination fee. This can range from 1-8% of the loan. These are usually added to the loan amount. What this means is that if you ask for a loan amount of around $10,000, you’ll need to actually ask for $10,800-$11,000 to cover it.
5. Understand How Your Loan Works
Different loans have different requirements as well as different terms and conditions. It is important that you know what sort of loan you need and how it works. When you take out a personal loan it is issued by your online lender, bank, or credit union of choice. You repay it at regular intervals, typically monthly, but some regular you to pay every fortnight. This can be repaid over a few months or over a few years.
Some loans require you to use your assets as collateral, while others use unsecured debt. Unsecured debt means that you typically don’t directly put an asset on the line as collateral. Assets are things such as your car or home. Sometimes you get the money in one lump sum, but other times you get it paid out monthly, or directly to your builders when they need a certain approved amount. Regardless of the loan you take out, if you miss a payment, your credit score will take a hit and it might make it harder to secure loans in the future.
If you find yourself struggling to repay your loan, then there are institutions that can assist you. This is however done by taking out an additional loan with them to help you repay the previous one. This is a bit of a gamble, but can pay off as these could offer you a lower interest rate on your repayments than your original loan.
6. Implications on Tax
There are typically no tax implications when it comes to taking out a loan. This is because it is not considered income. However, if the loan is cancelled, or “forgiven” it could turn into taxable income, so be aware of this.
Taking out a loan can be helpful, but it doesn’t come without some level of complication. It is important that you make yourself fully aware of what you are getting yourself into before signing any documents.