Lån: What You Should Do Before Taking Out a Loan?

Unlike the super-wealthy who can have almost anything they dream of, most average people have to save up for expensive purchases. Take buying a home, for example. A recent study has shown that compared to a decade ago, the average cost of a home has increased by nearly 49%.

In the U.S., the average home price sits at $374,900, according to the Motley Fool. In contrast, the average family income in the U.S., as of 2019 was just over $68,000. Putting both figures side by side, it’s obvious that the average family would struggle to purchase a home without some form of assistance. Visit the policy advice portal to see more stats on income in the United States.

But real estate isn’t the only thing that has gotten more expensive in the last decade. College tuition, medical fees, and the cost of living, in general, have climbed significantly over the last ten years. To finance these larger expenses, most people resort to taking out loans.

Loans can be good or bad depending on how you understand and use them. For instance, you can purchase rental properties without using a single dollar of your own money. What’s interesting is that you still get to receive the rents for those properties. Now, the rents you receive are then used to make your monthly mortgage payments for the property.

Businesses take out loans to finance expansion, entrepreneurs do the same to start small businesses, and so on. There are many ways in which these advances are helpful to us. That said, you don’t want to take out an advance every single time you have some financial difficulty. Taking out loans without adequate planning is a quick way to wreck one’s finances. Before you take out an advance, there are a few things you might want to do first.

Do These Before Taking Out a Loan

These advances can be a great option if you don’t have the cash in hand to finance an expense or don’t want to dip into your savings. But before you fill out an application, it is important for you to carefully consider how a loan would affect your finances down the road. Doing the following will help you make a more informed decision.

1. Credit Check

The first thing you want to do is check your credit score and history. People with a good credit history and high credit score typically qualify for loans a lot easier than those without. They also get to qualify for lower interest rates which could help them save thousands. Make sure to check your credit before applying to see if there are areas you can improve. One quick way to improve your score is by paying down your credit card debt.

You could also approach those lenders that allow customers to apply to prequalify for a personal loan. This prequalification application helps you determine your chances of your loan being approved if you eventually apply. For prequalification, a soft credit inquiry is done into your credit history. This soft inquiry doesn’t affect your credit score, but a hard credit check does. The hard credit check is carried out by the lender whenever you officially apply for a loan. It is worth noting that every hard check reduces your credit score by a few points.  

Therefore, it is advised that you first gauge your chances of approval with the prequalification before officially applying. If you don’t prequalify, then you can hold off on your application while you work on improving your credit score. However, we should mention that prequalifying for the advance doesn’t necessarily mean that your application will be approved. Moreover, even if you do get approved, the final terms may change.

2. Prequalification Process

The prequalification process helps both borrowers and lenders. Borrowers get to see the odds of their loan request being granted while lenders get to gauge whether the borrower can repay the advance if it is granted or not. Now, the prequalification process will most likely vary depending on the lender and the type of advance you’re looking to get. That said, most will require the following:

• Identification details, including your full legal name, date of birth, Social Security Number, and address.

• Information about your employment status, information about your employer (if you work for someone), gross monthly income, and bank account balances.

•  Information about any monthly debt obligations, such as credit card balances, rent, student debt repayment, and so on.

• Your permission to carry out a soft credit inquiry. Click here to learn more about a soft credit inquiry.

3. Consider Your Income

Most loans are paid in monthly installments. This means that once the borrowed funds have been disbursed, you’re expected to pay a certain amount every month over the term of the loan. With this in mind, you want to make sure that your monthly income can cover this new expense.

First, write down how much you make each month after taxes. Secondly, calculate how much you spend on monthly living expenses, like utility bills, gas, and groceries. Next, subtract those from your monthly income. How much is left? If it’s enough to cover the monthly payment for the advance, then you may proceed to take the advance.

However, you must be realistic as this is very important when it comes to successful budgeting. If what’s left is just enough to cover the monthly payment, you may end up missing some payments down the road. A good rule of thumb is to have some money left even after subtracting your monthly loan payment.

4. Calculate the Interest

When you know how much you want to borrow and your credit score, you can get a rough estimate of how much you could pay in interest over the lifespan of the advance. As you probably know, interests influence the overall cost of an advance.  

Some loans have longer repayment terms and lower monthly payments. However, you could end up paying significantly more in interest over time compared to a short-term advance. For instance, say you take out an auto loan of $10,000 with a 3% interest rate and a three-year repayment term. You’d be making a monthly payment of about $300 and would pay a total of $900 in interest over the life of the advance. But, if you stretched out the same loan over, say, five years, you’d be paying significantly more in interest.

5. Compare Offers

There are a ton of lenders out there so you shouldn’t settle on the first one you approach. Shop around to see which offers are available and the option that best suits your situation. Compare loan amounts, interests, terms, and fees, such as origination fees and early payment penalty fees.

It is important that you take your time doing this to ensure that you get the best deal possible. If you’re lucky, you may even stumble on those lenders that approve requests in under 24 hours depending on credit scores. Visit billigeforbrukslån.no/lån-på-minuttet/ to learn more.

6. Consider Collaterals

If you’re not very confident in your credit score and history, borrowing against an asset (collateral) can significantly improve your chances of success. The lender is more likely to accept your request since they have a means of recovering the borrowed funds if you default. If the borrower fails to offset the debt by the end of the tenure, the collateral is sold off to recover the owed funds. Sometimes these assets are even sold for a profit, earning them more than they initially gave out.

By borrowing with collateral, you’ll also get lower interest rates because as we said earlier, lenders have a means of recovering their losses. The fact that funds are borrowed against an asset reduces the risk they face. So, if you urgently need cash to get out of an emergency but don’t have a great credit score, you could get approved regardless with collateral.

When to Take Out a Loan?

Even if you have a high credit score, you should only take out loans when they are indispensable. Experts advise that you only take out an advance when:

• You can consolidate debt at a lower rate. Debt consolidation helps you to pay off multiple debts with one new debt, leaving you with just one monthly loan payment.

• You have an emergency. For example, a car repair, home repairs, or medical bills.

• You can make money off the advance. For example, financing a business expansion or buying a rental property.

Final Thoughts

Done right, advances can be a great way to take off pressure from a necessary expense. But it can quickly cripple a person’s finances if not done and managed properly. Therefore, everyone should ensure that they learn as much as possible about it before considering taking one.