From going to college to purchasing your first home or car, taking out a personal loan is a common practice in American financial culture. What’s more, the prevalence of financial apps and websites have made obtaining a loan a much easier process, as the Washington Post reports that the number of personal loans rose by 10% between 2018 and 2019.
Loans are helpful when we’re strapped for cash during an emergency or when we’re looking to pay something off over time instead of all at once. However, since loans come in all shapes and sizes and can be used for various reasons, they can be quite confusing and intimidating, especially for first-time borrowers. That’s why it’s essential to be cautious before you take out a loan so that you can make your payments on time and avoid penalties along the way. That said, here are some key considerations you should make:
What’s Your Credit Score?
Before you decide to apply for a loan, be sure to check what your credit score is. As we’ve previously discussed in our list of ‘Things to Know Before Applying for a Car Loan’, your credit score plays a big role in determining the costs of your loan. If you have a high credit score that’s within the 670-850 range, you’re more likely to receive a good amount with low interest rates. But if your credit score is anywhere below 579, then chances are that lenders will supply you less at a higher interest, as they’ll want their money back fast.
A credit score signifies how much a lender can trust you with their money. When your credit score is at the lower end of the spectrum, it’s best to wait for it to go up and reach a high range before you take out a loan. This is because your loan payments will affect your credit scores as well — not being able to pay them because of high interest can cause a significant drop in your score, which will further lessen the likelihood of getting a good loan in the future.
What Type of Loan Are You Applying For?
More often than not, people take out a personal loan when they’re in a bind, which is why approval times are a crucial component when you apply for one. Approval times vary depending on the type of loan and the institution you are borrowing from, so it’s best to keep in mind what you’re going to be using the money for. In fact, getting title loans approved in Cleveland can be as fast as 24 hours, which makes it especially useful for emergency situations when you need a speedy application and approval process. The same can be said for personal and small business loans in states like New Jersey, which Forbes reports has the highest rate of loan approvals in the country. On the other hand, banks and credit unions across the country can take up to three weeks.
Before you send in your loan application, be sure to check all the requirements needed to ensure that your documents are complete. This way, you lessen the need to go back and forth, and will be able to get the money you need promptly.
What’s the Interest Rate?
Did you know that nearly half of all American college students don’t think they’ll be able to pay off their student loans because of high interest? Although you don’t decide how much money an institution will give you, you should consider checking the interest rate they will set for your loan. If you’re not careful, the interest rate, or the amount you’ll be charged for borrowing money from a lender, can cause the size of your loan payments to skyrocket in a short amount of time.
Secured loans like mortgages and car loans have lower interest rates because you’re providing them with collateral in the form of a house or car, respectively. But unsecured loans, such as student loans, medical bills, and credit card debt, have higher ones because you can’t pledge collateral. Knowing the interest rate of your loan can help you gauge how much your payments will be, and if you can pay them off or not.