At some point in everyone’s life, it’s necessary to take out a loan. Still, there’s a stigma around taking on debt and owing money. Getting a loan doesn’t have to be a negative experience, it just requires planning and careful consideration.
Whether you’re seeking financing to pursue post-secondary education or purchasing a new car, a loan can help. Here are five things to consider and evaluate before taking out a loan.
Check Your Credit Score
The first thing to look at when taking out a loan is your credit score. Your credit score is a summation of your credit history. The number is based on how much you’ve borrowed in the past, if you make payments on time, your debt ratio, and if you’ve defaulted on loans in the past.
Your credit score will ultimately impact your eligibility for loans and what terms you’re granted when borrowing money. The better your credit score, the better your loan terms.
If you plan on securing a loan sometime in the future, take positive steps toward improving your credit score. There are services available online that can help you find your score, as well as many tips on how to improve it. Once you know your score, you should know that a score of 750 and above is considered “good.”
Understand Your Budget
Taking out a loan should help you achieve or acquire something you need without putting you in a precarious financial situation. To find this balance, you’ll need to take some time to understand your budget and determine what you can afford to pay back each month.
Keep in mind that the interest rate and terms will play a role in your payment amount. Consider using a title loan calculator to see how various terms and interest rates will impact your monthly payments.
Read the Fine Print
Sometimes loans come with hidden fees that could dramatically impact your financial future. If you miscalculate and get a loan that you can’t afford to make payments on, you’ll end up damaging your credit and could lose your collateral.
Always take the time to go through your paperwork carefully and read the fine print before signing anything. Determine whether there are hidden fees, like an origination fee, administration fee or an early payback fee. Understand the consequences of not making payments, like having your car repossessed if you don’t have valid insurance, for example.
Don’t hesitate to go over your paperwork with a highlighter and jot down questions about various inclusions and passages that come up. It’s better to take your time and avoid costly errors, so careful consideration is key.
Consider a Contingency Plan
When deciding to take out a loan, it’s crucial to explore all of the possible outcomes. Start by evaluating whether it’s possible to secure part or all of the money from another source, like a line of credit or borrowing from a family member.
If the loan is your best option, consider what happens if something goes wrong. What if your car breaks down and you need to pay for it — will you have enough room in your monthly budget to pay down your loan and cover the cost? What if refinancing isn’t an option?
It’s better to explore the worst-case scenarios and create contingency plans than to blindly hope for the best. Hopefully, you’ll never need the contingency plan; research and time can help prevent those outcomes.
Find a Reputable Lender
A reputable lender wants to see you succeed. They want to get their money back and are happy to answer any questions that contribute to a successful outcome. However, there are con artists and unethical lenders who thrive on your failure.
Start by talking to well-known and respected banks and credit unions for guidance. When looking at alternative lenders, ask for recommendations and take the time to read reviews and testimonials. Understanding your rights as a borrower will also help you protect your best interests when securing a loan.
Time and research go a long way when finding the right loan for your financing needs. Use this simple guide to navigate the process and avoid costly mistakes that could impact your long-term financial health.