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Applying For Your First Loan? Follow These Tips
As global inflation continues to rise, price levels have also experienced an upward shift. Whether it is real estate or automobiles, prices are increasing every day.
It might signify a growing economy, but it has massively affected purchasing power.
People cannot make ends meet, making investing in assets and valuables impossible. It is one of the biggest reasons people have turned to debt financing.
Many people have started taking loans to bridge the financial gaps.
After all, loans come in quite handy today. People use those funds for routine expenses, buying a car, or starting a business. So, do you know how a loan works?
Anyone with a stable income source and a reliable credit score can seek a loan from a financial institute or an online lender.
Most lenders allow borrowers to apply online and upload their financial documents. Remember, the lender will consider employment status, credit history, and outstanding debts before approving a loan application.
Let us help you on your borrowing journey if it’s your first time.
Here we have outlined five tips for applying for a loan.
Run the Numbers
The only thing you don’t want is to acquire the loan and not be able to pay it off.
Even though lenders perform due diligence before approving the loan, you must run the numbers to assess your ability to repay. Begin by determining how much cash you have and how much more you need.
Lenders often deduct an origination fee from loan proceeds. Hence, ensure to account for that.
Next up, use a loan calculator to estimate your monthly payment. If you’re in New Zealand, you will find different loan calculators online but look for reliable ones like https://nectar.co.nz/calculator/ for accurate results.
It will make all calculations based on the prevailing market interest rate. Therefore, you can play around with the numbers and see if monthly payments fit your budget.
Assess Your Credit Score
When we talk about debt financing, your credit score can be a game-changer. A high credit score demonstrates credibility, helping you secure a loan at the lowest possible interest rate.
Similarly, a low credit score can decrease the chances of getting loan approvals. Hence, assess your credit score before applying for the loan.
You can download a copy of your credit report online and check thoroughly to ensure there are no errors. In case of mistakes, contact the credit reporting agency.
You are good to go if your credit score is between 588 and above. However, anything below that means you must work to improve your credit score.
Ensure timely bill payments, pay off your outstanding debts, and keep your credit utilization rate low. Some lenders offer loans to people with low credit but at high-interest rates.
In addition, the origination fee is also high. So, start improving your credit score before obtaining a loan.
Choose a Loan Type
The next step is considering your options and seeing which loan best fits your requirements. Most lenders are flexible regarding how borrowers use the funds, but others only approve loan applications for specific purposes.
Let’s say you want to purchase a car; the money obtained from a loan can only be used for buying a car. Hence, dig into the loan marketplace for different types of loans to make the right choice.
- Emergency Loans: These loans allow people to use funds for different purposes such as car breakdown, medical expenses, or home renovations.
- Car Finance: Getting car finance is the best choice if you want to purchase an asset. It doesn’t ask for collateral, as the asset itself acts as a guarantee.
- Debt Consolidation Loans: Debt consolidation is the most common loan. It allows borrowers to take out one loan to cover their existing debt. In turn, the monthly payment and interest rate decrease.
- Mortgages: With rising real estate prices, the mortgage is the only way to buy a home. It has a loan tenure of up to 30 years, making it easy to repay.
Get Pre-Qualified
Many lenders offer an option to pre-qualify or pre-approve the loan with a soft inquiry. Even though it does not guarantee loan approval, it increases your chances.
For pre-qualification, you must fill out a short form online, providing your name, income, address, and borrowing amount. It will enable the lender to conduct a small credit check.
If you pass, they will inform you have pre-qualified for the loan. Once that is done, you must pre-qualify with the lender.
You can review the information in your pre-approval to check the expected loan amount, monthly payment, and loan term.
Likewise, look at fees and penalties to determine whether the loan has an origination fee.
Most importantly, what’s the interest type? Are they offering a fixed rate or a floating charge? Either way, assess the difference in rates and which will cost cheaper.
Lastly, ask the lender if the loan is secured or unsecured. If secured, then what collateral must you submit?
Getting answers to these questions beforehand will give you a fair idea of what you are getting yourself into and if it is beneficial. Hence, you can prepare your financials and budgets accordingly.
Provide Necessary Documents
After submitting your loan application, the lender will start requesting additional documentation. That is because every lender has a different way of approving and assessing loan applications.
Don’t hesitate to share the documents if they ask for your driver’s license or proof of residence.
The faster you provide all information, the sooner you will hear back from them.
Most lenders ask for pay slips, tax returns, and employment proof to speed up the application process. Sometimes, lenders might ask for details of your outstanding debt.
Based on that, they determine if you repay timely or your credit history. Hence, prepare all these documents to get the application approved quickly.
Once you get approval, read the entire agreement thoroughly before signing. Ensure the repayment dates are flexible, your loan tenure is correct, and the interest rate is the same as decided.
Final Thoughts
Getting a loan is an extremely convenient way to secure funds, especially if the interest rates are low.
If you have also decided to take a loan, determine if you can afford to pay the debt.
Likewise, closely monitor your credit score and work on improving it. You can also explore different loan types to select the one that suits your financial needs. The key to getting your loan approved is research and transparency.
Learn how loans work and provide all necessary documents to increase approval chances.
Fact Check
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