A COMPREHENSIVE GUIDE ON BORROWING MONEY
Defaulting on a loan can have serious consequences and one should not underestimate the importance of the arrangement they are getting into when they are considering a loan. Regardless of whether you are taking out a small $1000 personal loan to cover your expenses until the following month, or taking out a mortgage for $2 million, you need to be careful every step of the way and consider all relevant factors before you decide on your lender.
The legal implications that come with defaulting on a loan are quite worrisome. If you default you can end up with issues such as forfeiture of security, penalties, fines, or, worst of all, recovery proceedings before a court of law. You could even end up with all of these problems at the same time, depending on what type of loan you’re subscribing to. While one cannot deny that the impacts of defaulting on a loan are worrisome, that’s not the first, and definitely not the only thing you need to worry about.
A loan on its own has financial implications, without having to worry about defaulting on the loan. A loan is a legally binding arrangement, which won’t change according to your circumstances. If you take out a mortgage, the arrangement still stands and you need to make your payments even if you only had one kid when the mortgage started and now you have five and the expenses have gone up. Your personal loan may only be for $1000 but you need to pay it, along with your existing bills and payments. If anything, a loan adds to the financial load.
However, the good news is that you can contain your liability and limit your risks if you take a calculated and prudent approach to the entire process. From interviewing different lenders, all the way to signing the loan contract, you need to stay constantly vigilant and deal with matters using a reasonable approach. Loans are a reality of our life and at one point or another we all need a little help to get along. Feeling shame over the prospect would just inhibit one’s ability to take a cautious approach and, therefore, one must go into the process with a clear head.
This article has been written with the intent of preparing you for the borrowing process. We will discuss different stages and aspects and give advice on how you should deal with them. We’ll discuss the measures you should have in place before you speak to any lenders, the questions you should be asking, and the different aspects of loans that you should be aware of.
MAKE SURE YOU HAVE EVERYTHING READY
As mentioned above, loans are a serious legally binding arrangement with ramifications for all parties involved. Considering the complexity in place, it should come as no surprise that a lot of red tape is in place and a significant amount of scrutiny is in place. Even with small personal loans, there will be some measure of scrutiny. As such, you need to have your documentation prepared and at hand, in case any lender wishes to review your financial details.
You need to be ready to divulge bank statements, bank account maintenance certificates, credit reports, employment letters, salary slips, character certificates, and, depending on the type of loan, maybe even a legal guarantee. If you refuse to provide anything, your application will end up being rejected. If you delay in submitting anything, it’ll delay the process as a whole even further.
Also, speaking of delays, you should know there is no hard and fast rule on the time it takes to gain approval. There are a number of factors that could affect the time it takes to gain approval, including the type of loan you want, your credit history, compliance fulfillment, etc. You could end up getting an approval in a matter of hours or even have to wait an entire month.
Keep a notebook and pen with you when you’re speaking with lenders. Take notes of the details they’re giving you so you don’t miss out on anything when you’re comparing different lenders and deals.
BUDGETING IS KEY
Part of your loan arrangement is to make monthly repayments that lead to full repayment of the loan. Known as an Equated Monthly Installment, or EMI, the repayment amount includes the monthly amount payable against the amount of the loan, along with the applicable interest accrued on the loan amount. Depending on what type of loan you obtain, you could be making payments for 30 years, as you would with a mortgage, or even as short as 6 months, found more commonly with small personal loans.
Regardless of the term of the loan, you need to understand that it will remain a constant as long as it is still in effect. You need to prepare your finances while keeping this loan term in consideration. For example, if you take out a mortgage as a newly married couple, you need to account for the fact that you will need to keep making these payments even if you have kids and your expenses exponentially rise. You will have to figure out whether you can keep up with such expenses before you subscribe to the loan, otherwise you end up with even more of a liability than you did before.
Considering this fact, you first need to sit down and work out your budget. For short term loans, you need to figure out how much you can afford to pay currently. Also, adjust your savings to create a small cushion just in case you fall behind on one payment and need to dip into savings to pay it off. Account for at least four EMIs in your savings just to stay on the safe side and give you some breathing room if some unfortunate circumstances, such as being laid off from work, were to arise.
If you’re considering a long term loan, like a mortgage, then in addition to the above you also need to realistically assess your prospects in the future to figure out if you can keep up with payments and growing expenses. Again, let’s take the example of a mortgage. If you were to have a baby, then you need to figure out how much your expenses will go up and if you can continue to afford making your payments with another mouth to feed.
Therefore, budgeting is key when it comes to preparing for a loan. Sit down and assess your budget in detail. You can also take help from a financial expert or a friend who works in the accounting or finance field. Either way, make sure you’re ready to meet your financial obligations under the loan.
Your credit score shows how creditworthy you are. The better your credit score is, the more willing lenders will be to lend you money. Credit score also has an impact on the interest rate that would apply to your loan and the term of the loan as well. The better your score is, the lower our interest rate will be, and you’ll be able to get a repayment term that suits you more.
There isn’t a set formula for calculating a credit score and different regions and companies will have different formats of scoring. However, the factors used to calculate the score are usually the same and include outstanding loans, the amount of money borrowed and repaid, and adherence to the installment plan by making timely payments.
You can check your credit score without any issue and if you find your score to be somewhat lacking, then there are some measures you can take to improve it. Stay punctual with outstanding payments, as punctuality translates to reliability in the eyes of the lender. This is one of the most important factors that lenders look at when they’re assessing a loan application.
Also be mindful of the loans you’ve subscribed to. If you have too many loans and you’re not managing them well, it shows up as you being financially irresponsible. If you’re already in debt and are having a difficult time managing it, then a lender will be less willing to give you money. If you have to many outstanding loans, consider a debt consolidation loan to bring them all under one umbrella. This will have a good impact on your credit score.
The above doesn’t mean you can’t get a loan if you have a bad credit score. You can still find lenders who will be willing to part with their money but it will be at an increased cost. You’ll be looking at a higher interest rate, smaller loan amounts, and restricted loan terms.
In consumer terms, you should see loans as a service, and the payment the service provider (in this case the lender) charges a price, which in the case of loans is the interest on the loan. This interest rate is the profit that lenders get from extending you the loan and is their only incentive in the arrangement. Contrary to what you may see in wholesome TV commercials, loans are nothing more than a way for people with money to make even more money.
In addition to credit scores, interest rates also vary on the type of loan in question. Mortgages and business loans have higher interest rates than personal loans because the term of the loan is MUCH longer than you would find in other types of loans. This extended term also results in a variance in the interest rate after a fixed period of time has lapsed, usually ten years. This longer term translates to a higher risk for lenders, which is what they use to justify the higher interest rates.
DO YOUR RESEARCH AND STAY VIGILANT
You need to conduct in-depth research before you decide on a loan. With so much competition in the market, you’ll find a long list of vendors offering one deal after another. You can use this competition to your advantage and interview a range of lenders. Compare rates and deals, at times in front of the lender, to see what deal suits you best. This might make the lender nervous and he might just end up offering an even better deal.
Start off with your bank as the pre-existing relationship could mean you get a quick approval with low interest rates and a preferable term. The bank already has all your financial information and will be able to give you an answer fairly quickly regarding approval or rejection. Your pre-existing relationship could also help with leniency if you were to default on any payments.
When you do decide on what deal is best for you, make sure that it is captured properly in your loan contract. Read the fine print thoroughly and understand every term in the contract. You can even ask your lender to give you time to read the contract and have it checked by a lawyer friend or professional. Make sure that you’re aware of all the ramifications if you were to default. You should know the entire arrangement like the back of your hand.
At times, lenders might charge you extra and call it a fancy name like “handling and management”. You need to be sure you’re aware of all the costs involved and compare them with other lenders to make sure you aren’t being swindled. If anything seems off, move on to the next lender immediately and contact your local credit bureau just in case they are able to help with the situation and rectify it.
We hope the above is able to help you in your quest. If you’re looking to borrow money for a personal loan or business loan, you can consider consulting with Quick Loans. You can find loans by simply filling out an online form that won’t take longer than 5 minutes. You’ll be connected to a panel of lenders to find you the best deals instantaneously. You can find same day approvals for deals that perfectly suit your needs.
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