Five things you need to know before taking out a loan
So it’s time to take a loan. But where do you even start? There are so many things that you need to know about before you borrow money.
Things like what are direct loans? What are the interest rates? Who is the best loan provider? A loan is a big step to take for your finances, and it’s certainly not something that should be done on a whim.
Loans can be hugely beneficial for many people, especially in these times when it’s not always possible to have emergency savings. Life can be expensive and there are times when it is difficult to keep your head above water. Taking out a loan can be a lifesaver in these circumstances.
But before you take out a loan, there are some things you really need to know. Here are five of them.
1) Make sure your credit score is good
If you want to take out a loan, you will have an easier time doing so if you have a good credit score. A credit score isn’t just important for taking out a mortgage. In fact, personal loans are often more risky for lenders as they don’t have a property that they can use as collateral in the event that you can’t pay back the loan on time.
For that reason, you will need to prove to the lender that you are reliable with making repayments when applying for a loan. And that is where your credit score comes in.
Interest rates can be incredibly high for people that don’t have good credit scores – we’re talking more than 35% APR. To try to see if you can improve your credit score before you take out a loan.
2) There are a few different loan options to choose between
There’s not just one type of loan you can take out. You can choose from a wide variety of different loans. For instance, a bank loan is very popular and they don’t tend to come with very high interest rates at the moment. You can also take out credit cards, auto loans, mortgage loans and business loans. There are a number of options that you can take advantage of if you need to.
3) Taking out a second loan can damage your credit
If you have a number of different credit cards and you owe out a lot of money, then you may find that your credit score goes down as a result if you take out another loan. There’s a common assumption that if you take out a few loans and pay them off on time that your credit score improves, but this is not the case if you owe a lot of debt.
Adding extra debt to that number can cause some serious damage to your credit score. You can also be the subject of skip tracing (if you don’t know what this is, you can learn more). You need to think about this before you take out the loan. Is it a risk that you’re willing to take? In some cases it may be worth it, so give it some thought.
4) You can use collateral to reduce your loan interest rate
In some cases, you may find it difficult to get a decent rate for a loan. In this case, it can sometimes be possible to get a loan with collateral and this will reduce the rates. This is basically how car loans and mortgage loans work. A secured collateral loan is a little different than your standard loan, but you can save a lot of money with them. If this option appeals to you, it can be worth getting a collateral loan or a saving secured loan to start with.
5) You must always read the terms and conditions before borrowing money
Nobody likes to read lots of paperwork. But when it comes to your finances, it’s dangerous not to read the fine print. Some loans can occasionally come alongside extra fees that you need to consider. For instance, there may be loan application fees, loan origination fees and extra insurance policies. You may not even be aware of it straight away.
So make sure you’re asking questions about what you’re borrowing, and ask about things like prepayment penalties. Some lenders will charge you money for paying back money early. In addition to this, ask about the repayment schedules. If you have more information then it will help you to make a more informed decision.
Do your research before taking out a loan
Now you know a few things about taking out a loan. Hopefully, this guide will help you to figure out whether a loan is the right choice for you. Always remember – don’t hesitate to ask questions! This is about your financial health, so it’s never a bad idea to be well informed.