A new loan is not only an opportunity to fulfill your necessities but also a serious financial commitment with long-term effects. This article lists the main factors to bear in mind to avoid impulsive actions and mistakes when applying for a loan.

The type of the loan

If you have come to the idea of a loan, you already have an identifiable need you intend to satisfy with the money. Financial institutions offer numerous credit products depending on the customer’s needs, for example, for the purchase of a house or apartment – a mortgage loan; for car purchase – car loan or leasing; for various daily expenses – short-term loan, credit card; for studies – student loan, etc. Considering that there are multiple types of loans available, we recommend that you familiarize yourself with the offer of the financial institutions and apply for a consultation, where the company representative will help you choose the most appropriate solution. Ask questions about the loan application process, time frame, standard terms, and repayment schedules to understand whether you have the means to repay your loan promptly.

Avoid the fraudsters

Financial products have become an integral part of consumer society. Therefore, various fraudsters have been active in recent years who can also disguise behind the image of an organization that looks legitimate on the outside. Always check the public records of the lender you choose, paying attention to whether this lender has received an appropriate license that allows providing financial services. Only this way you will be able to ensure the protection of your rights. It is also worth looking at the company’s public communication channels and customer reviews, which are relevant indicators of its reliability.

How much money do I need?

Always be critical about the loan size and borrow only as much as you need. Not a cent more. Depending on the credit institution and credit product, you can apply for a loan from a few hundred to tens of thousands. However, if the required amount is minimal, always consider the possibility of saving this amount yourself or borrowing it from family members or friends.

How long will I have to pay it back?

Different loan products offer different default repayment terms. Credit institutions often allow customers to choose shorter or longer repayment term. When making a choice, remember that a shorter repayment term will allow you to save on interest rates, but the monthly payment will be slightly higher. In comparison, you will pay more in interest rates in total with a longer repayment term, but the monthly payment will be lower. When taking on extended financial obligations, try to set aside free funds over time and use them to reduce the amount of credit sooner.

How much will I pay in interest?

Your interest fee depends on several factors, but it is often based on your credit score, loan amount, and loan term. Interest rates differ both within product categories and between different lenders. Most often, you will have a lower interest rate if you have an excellent credit history or credit score and if you choose a shorter loan term and smaller amount. Always pay attention to the annual interest rate and the administrative costs required by the lender when issuing the loan and preparing the necessary documentation. Compare these costs between several lenders and choose the offer with lower rates and additional costs.

Will I be able to cover the regular monthly payments?

When you have received the offer and know how much the monthly payment will be, perform the DTI calculation. The DTI ratio is an excellent indicator for evaluating your financial situation and current financial obligations. Also, this indicator should help you assess whether a new loan will cause an excessive financial burden on your monthly budget. The formula to calculate your DTI is a simple one:

Step 1: Add up your regular monthly bills, including housing costs, utility payments, regular education payments, child support payments, and other debts.

Step 2: Divide the total obligations by your monthly net income, and you will get a percentage that is your DTI.

Example: Maya is looking for a car loan of 20 000 USD. She has a salary of 2 000 USD after taxes and is spending 400 USD each month on a mortgage loan, 50 USD on a student loan, and 250 USD on regular utilities. The total monthly obligations add up to 700 USD. Her DTI is calculated by adding up (400+50+250) and dividing it by 2000. Her current DTI is 700/2000=35%. Most financial institutions might consider this ratio high since if she gets a loan of 20 000 USD with a monthly payment of 290 USD, her DTI will become even more significant (700+290)/2000=49,5%. Always consider staying below the 50% mark.

Penalty charges

Various things can occur in life that can temporarily affect your ability to meet your regular monthly obligations. Therefore, it is worth discovering the sanctions the creditor can impose for delayed payments. However, we strongly suggest that you always protect yourself against such situations by making small monthly savings, which can serve as a lifeline if you face short-term financial difficulties that negatively affect your ability to pay off your obligations on time. In addition, always remember that in such situations, you can contact your creditor and, by explaining the objective reasons, agree on a temporary solution, such as deferred payment. Never ignore a monthly payment, as it can permanently damage your credit history and chances of getting a loan in the future!

Fine Print 

There’s always fine print, even in pre-approval applications. Look for anything not answered above or anything you hadn’t thought of.

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