What is the process for getting a loan? What are the successes and pitfalls to be aware of?
Both men and women may find that they are short on money and have to take out a loan to cover their expenses.
They could be in this situation because an emergency arose and they did not have the funds to cover it. Sometimes they need a loan to cover a major purchase, such as a house or a car. Whatever the reason they are considering this option, they should make sure to choose the right loan provider. What does a person need to know when taking out a loan for any reason?
Types of loans
First, a consumer should know about the different types of loans and the pros and cons of each. For example, a person does not get a payday loan when they want to buy a house, and they would not take out a mortgage to cover a car repair. Read the following tips for taking out a loan and ask questions if there is anything you don’t understand. An informed consumer finds it easy to determine which loan to get and why.
Payday loans provide quick cash, often in 24 hours or less, that many people need. People often call these loans cash advances because the lender advances them with cash that is to be repaid with the borrower’s next paycheck. The main disadvantage of these loans is the high rate of interest, which can reach triple digits. The Consumer Financial Protection Bureau advises borrowers not to take out this type of loan until all other options have been exhausted. However, people with bad credit often find that this option meets their needs in every way.
One of the most expensive ways to borrow money today is credit card cash advances. When a consumer takes an advance, the credit card issuer charges a transaction fee, which typically ranges from three to five percent of the amount of the advance. The rate for cash advances is higher than that of credit card purchases, according to Bankrate. While this option is a better choice than a payday loan, borrowers should consider using a balance transfer option if available. Another option is to contact the card issuer to request a credit limit increase or ask if one or more payments can be skipped.
Personal or unsecured loans remain a popular option with borrowers. These loans are unsecured and have a lower interest rate than payday loans and credit card cash advances. Borrowers know exactly how much their payment will be each month and when the loan will be repaid in full if all payments are made as agreed. A person with good credit will find that they can get a personal loan with a favorable interest rate, although the rate is higher than that seen with a secured loan.
Secured loans, such as a home equity line of credit, tend to have the lowest interest rate. The lender requires collateral with this type of loan. Since they can take possession of the collateral if the borrower does not pay as agreed, they take less risk. That is why they offer a lower interest rate. However, borrowers should recognize that they could lose their home, vehicle, or any other property that they are using as collateral for this type of loan. They need to decide if they are willing to take the risk before borrowing the funds.
Guarantee a loan
Before applying for a loan, a borrower must take certain steps. Missing one step can cause the borrower to pay more than they owe to get the funds they need. What are these steps?
- Check your credit score
- Determine how much you need to borrow
- Compare prices and products
- Read the fine print
Before borrowing money, a person should know their credit score. This score has a significant impact on the interest rate they will be charged. The higher the credit score, the less interest the borrower will pay over the life of the loan. Several sites now offer free credit scores, so check these sites first. If you can’t find a site offering a free score, pay for this information. This provides you with information that will come in handy as you go through the process.
Borrowers should never take out a loan for more money than they need. Funds are not free, so less is better in this situation. Lower amounts mean you pay less interest over the life of the loan. In addition, the repayment of the loan will be more affordable each month. You don’t want borrowing money to solve a financial crisis to create a whole new one.
Compare the rates of different financial products to see which one best meets your needs. As mentioned earlier, secured loans come with the lowest rates. However, the rates vary depending on the lender, and a person can save large sums of money by shopping. Fortunately, the internet offers comparison tools, so borrowers can compare lenders quickly and easily. However, follow up by visiting the site of each provider that you think you can use. This ensures that you have accurate information before proceeding.
Never sign a loan agreement without reading the fine print. Look for clauses that deal with things like prepayment penalties, late fees, and filing fees. These items are often hidden in the fine print and can dramatically increase the overall cost of the loan. Other fees to look for include annual fees, setup fees, and handling fees. Ask the lender if these fees can be prepaid or if they need to be built into the loan. Pay them in advance when possible to reduce the total interest paid and the monthly payment.
Apply for a loan. Make sure that all the information needed to complete the process is readily available. This will likely include proof of your identity, verification of your address, and proof of income. Each lender determines what documents are required for a loan, so request this information before starting the application process. Having everything at hand makes the application process easier.
Loans become a great help when you are strapped for cash. However, choose your financial product carefully. This ensures that you get the funds you need without hurting your financial future. If you are unable to find a loan that will help you in the short and long term, it is best to consider other options.