There’s a popular saying that no one is self-sufficient in life, and this also applies to the financial world. In other words, there comes a point where you need money to fund a particular need, but you currently don’t have it or it is inaccessible at that particular moment. It could be an investment need, perhaps you want to purchase a car, or maybe you need to buy a home. You may also have a self-improvement need or a matter of urgency that requires the money quick ASAP. The list of reasons for borrowing are literally endless.
One thing we can all agree on is that in such a scenario, borrowing becomes an automatic option to fund your needs. This is a phenomenon that has been with us since time immemorial, and its part of what keeps banks and other lending institutions in business. But while taking a loan will always seem the most convenient alternative when you’re short on funds, it doesn’t necessarily mean that it’s always the best. True, many individuals and giant business organizations have managed to achieve huge accomplishments with the help of loans, but one thing is for sure… borrowed money will work best for you if you understand the ins and outs of lending.
On this note, let’s look at a few things you need to get in check before taking up a loan.
Justify your reason for borrowing
As earlier mentioned, there are numerous reasons why people approach lenders for a loan. But before you make that application, it’s important to ask yourself whether you really need the money or not. This is because, amid the many uncertainties in life, a loan can either help you or ruin your financial health. Also, some loans carry more risk than others. A mortgage loan, for instance, is better in many ways compared to a personal loan taken up to cater to ordinary expenses. Ensure that you really need to borrow before you do so.
Your credit score
Most if not all banks and other lenders will always scrutinize your credit history before approving you or even considering you for a loan. Remember, they’re in business to make a profit, and the slightest negative element they note on your credit history could cause them to doubt or question your ability to pay their money back. Before you borrow, therefore, you’ll want to ensure you have a credit history and that your credit score is at least in the “good” range, which is about 700 or above in the US. And loans aside, the guys at Money Expert say that your credit score is affected even your insurance installments, credit card repayments, and monthly installments when leasing a car can all affect your credit, either positively or negatively. Before getting a loan, it’s best to ensure all your monthly bills are cleared and up-to-date if you can. A good credit score can fetch you better deals in the world of lending, including fairer repayment plans and lower interests. For this reason, you’ll want to ensure your credit report has no negative listings that could put your creditworthiness in a bad light.
Your income and loan costs
Borrowing is always easier than paying back, especially since loan repayments often have interests and penalties attached to them. While getting a loan could seem like the only choice you have to fund emergencies after you’re out of a job or a big business deal, it’s best to take up a loan that you’re sure you can afford to repay within the time frame agreed upon. Late payments and defaults are among the major reasons loans become burdensome, not forgetting the damage they can do with your creditworthiness.
Your identity documents
No lender will approve you for a loan without standard identity documents that have been certified. Depending on the type of loan you wish to apply for and where, some of these could include social security, national ID, a valid passport, property documents, PIN certificates, and so forth. Be sure to contact the lender you wish to apply for your loan from to get a list of required documents before making your application.
Collateral (do you need it?)
Secured loans often require you to provide collateral, which is usually an asset that the lender could claim a lien on, in the event you’re unable to repay their money owed. A collateral could be an asset, such as real estate property, household equipment, company assets, your car, and other property owned under your name. But before you go ahead and sign on the dotted lines, is the loan worth risking your property on?
If well managed, a loan can get you out of a miserable situation. It can help you grow personally or business-wise. However, the opposite is also true if you don’t consider your options carefully. All the same, the above are just a few things to get in check before taking up a loan.