For many people these days, loans are quick getaways to fund big purchases that they can’t afford upfront. Be it for a new car or a home, some carelessly apply for a loan without thinking twice or multiple times as it should be. But one important thing to understand is that this is a big financial step to be taken lightly. The worst part is, this single commitment can either make or break your financial status even more.
For that reason, it’s essential to be smart and careful in choose the right loans and lenders. The last thing that you want to happen is to dig a deeper grave of financial problems and pay for interest rates until your retirement. To help you avoid these, here are the most crucial factors and tips to take note of before getting a loan:
- The type of loan
The first thing to think of is the type of loan you need. One of the popular ones is the personal loan, which can be used for almost any reason with some people using it to pay for their high-interest credit card debts. Other varieties of loans include mortgages, auto, payday, student, small business, and debt consolidation.
Generally, there are collateral requirements for some secured types of loan and has required credit score before one could avail of the offer. For individuals with relatively poor credit scores or lower incomes, options such as an automotive title loan, wherein the borrower’s car will be used as collateral. To better assess the type of loan you need, consulting a financial advisor is recommended.
- Your credit score
Speaking of credit ratings, this particular factor is primarily essential for most lending offers and companies. A lot of financial institutions won’t approve your loan if your credit history doesn’t meet their requirements. For instance, availing of a personal loan or an auto loan will typically require you to have around a 600 credit score or higher. The higher your credit rating is, the better the interest rates you can get.
In case you have a low credit rating, it’s best to improve it by increasing your spending limit or clearing minor debts. On the other hand, if you, unfortunately, have a bad credit rating, it’s best to seek reputable lenders offering easy bad credit loan options.
- Your financial situation
Another important thing to take into account is your current financial position. The general rule is, if it’s not a necessity, avoid obtaining a huge loan that will just accumulate more fees as you go along. It’s crucial to recognize the restrictions imposed by debt obligations or the loan’s impact on your financial flexibility. You can use the debt-to-income ratio to gauge the amount of debt you can afford to acquire.
Ideally, you also need to have a clear look at your income and employment status to determine if you can comfortably pay for the loan in the years to come. If you can pay the loan without restraining your finances then you’re probably good to go.
- Consequences for failed repayments
Lastly, be sure you are aware of the consequences that come with a loan in case you fail to repay. When you sign up for a loan, there are terms you agree up in terms of repayment. As much as possible, you want to think of the worst-case scenario, especially if you don’t have a rainy day fund to cover the repayments when unforeseen circumstances happen. Debt cannot only impact your finances but also your career. You might have a hard time securing a job if you got too many debts chasing your tail.
Another consequence that might come your way is that the lender will report you to credit bureaus and shoot down your scores. If you’re in a secured loan with collateral, then you’ll lose that item if you fail to repay. There are also instances wherein lenders use third-party companies to collect payments. We’re telling you, they are not very friendly. Finally, you might get sued for failed repayments. In case you lose, the court can force you to pay back using your employment wages or by selling your personal properties.
Always remember that any kind of debt can be harmful to your financial health if not planned and done right. In fact, unwise decisions can even make your purpose for taking the loan useless if you’ll only end up in a worse financial situation. Follow our tips in this blog and talk to an accredited financial advisor to ensure you’re not making a bad money decision.
Hemant Kumar is a project manager at Tridindia with more than nine years of commendable experience in writing about LMS, translation, and IT. His unmatched talent and passion for digital marketing gave him the opportunity to work as a multi-tasking project manager at TridIndia’s sister company, Link Building Corp. Today, he contributes to the world by imparting knowledge on SEO, link building and internet marketing etc., that helps business owners grow their online business.