7 things you need to consider first before taking a loan Tips, Online Money Help, Finance Advice
7 Things You Need To Consider First Before Taking A Loan
5 May 2021
The perfect world would be one where we have all the money we need to meet our needs, wants, and luxuries, and nobody ever runs out of money. However, that utopian world isn’t a reality, and we all face a cash crunch at some point in our life. And this happens despite our efforts to stay focused, invest, and save for the future. Borrowing money need not always mean that you are in financial trouble. It could be to improve your life, make an investment in an asset like a house or car, or build your wealth, like in a business.
That is when taking a loan can come in handy. And a loan does not always have to be bad, which is why you can take a loan when you need money. However, make sure you remember these seven points before you apply for a loan. This would prevent you from running into financial woes and bankruptcy in the future.
1. Understand The Repayment Cycle
A loan would definitely come in handy to help you with that extra cash need that you have. However, it also comes in with some additional interest that you need to shell out every month. And each loan type and lender has different payment terms. So, to make sure you understand everything right and know what you are signing up for. Sitting down with your financial advisor or your loan officer to understand the fine print would help.
They will calculate repayments, interest, loan tenure, etc., that you would have to make before you sign off on the loan. Understanding this will help you get a better understanding of the loan you are taking.
Well, you need money and hence want to apply for a loan, and that sounds valid. However, that does not necessarily mean that you would indeed get a loan. Numerous factors play a role in deciding your eligibility for a loan. Everything from your age, employment, credit history to existing loans play a key role. So, make sure you consult a financial advisor or a loan authority to check your loan eligibility.
3. Compare Interest Rates
There are numerous types of loans available that you could benefit from, and each one has a different interest rate and payment term. This means that the way each of these loans would impact your credit score is also different. So, it would help if you were to spend time on each of the loan types available to you and understand their pros and cons. For instance, if you need some money instantly, you could go for a payday loan, a personal loan, or a peer-to-peer loan, etc.
All these are mostly unsecured loans and come with a high interest rate because the risk involved is higher. Alternatively, you could also go for a pawn loan, a title loan, or a secured personal loan from your bank. Once you decide on the loan type, you need to compare the interest rates to ensure you land the best deal. You do not want to end up taking a loan at a higher interest rate and be stuck in a cycle of debt.
4. Alternative Sources
If you borrow money from a private lender instead of a bank or any other financial institution, this might be important. You could borrow money from both private lenders and individuals offering peer-to-peer lending with varying interest rates. There are numerous websites out there that let you sign up and post your money request and profile.
The system would then access your creditworthiness and refer you to lenders with different interest rates. You could pick one from the list and take the process forward. This is a growing trend in the new age financial world because it opens up avenues for easy loans and has a lower interest rate than most conventional private lenders.
5. The Loan Amount
You know that you need money to meet some money and have decided that the best way to get it is by applying for a loan. And that’s a great start. However, there is yet another crucial step that you need to take before approaching a bank or a lender. You need to understand how much money you need because that is the first question that the lender might ask you. And the amount you need has to be realistic in terms of meeting your needs and your creditworthiness.
So, jot down the expenses for which you are going for a loan, have an estimated amount, understand how much you can pool in from your savings, and that would give you the loan amount you need. Remember, you should always borrow only the amount you cannot pool in from other sources and the money you absolutely need. So, do not go for a home loan to buy a fancy chandelier or a few pieces of furniture. Instead, apply for a loan that would help you meet your essential needs.
This is something most people miss out on checking while applying for a loan. Everyone knows that you need to repay the principal amount and the interest, and you could do this monthly. However, most people fail to understand the EMI or the easy monthly installments they would have to shell out as repayment. While you might do the math to understand the interest rate, it is possible to miss out on this fundamental calculation.
The EMI that you need to pay should be able to help you repay the loan on time without leaving you broke. Yes, it is important to repay your debts, but you shouldn’t end up getting in newer debts to meet your day-to-day expenses. So, calculate the percentage of your income you would shell out on EMI every month before signing the dotted line.
7. The Fine Print
As they say, the devil is in the details, and the details that could get you in trouble lurk in the fine print of the document that you sign on. So, before you take a loan, make sure you take a good look at the fine print and all that it has to say. The fine print usually includes details on the penalties, charges, fees, etc., all of which might cost you a bomb. You could consider taking a legal professional’s opinion to understand what you could be liable for by signing the documents to avoid trouble in the future.
Keeping these points in mind before applying for a loan would save you a lot of trouble in the future!
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