Getting a loan can be a complicated and time-consuming process. It can be financially draining if you don’t understand the terms and conditions of your loan. However, if you properly prepare and do some research in advance, you can avoid any adverse outcomes of applying for a loan. Try these simple steps to get a loan so you can identify favorable terms and rates.
DISCOVER WHAT TYPE OF LOAN YOU NEED
Before you begin shopping for a loan, it's essential to understand the type of loan you need. Deciding which loan you need may impact your interest rate and terms as well as the application process. For example, mortgages and auto loans are completely different loan products; therefore, borrowers must treat them as such.
Some of the most common loans include mortgages, auto loans, student loans, personal loans, and small business loans. Knowing what type of loan you need in advance will ensure you’re properly prepared for the loan application.
REVIEW YOUR CREDIT SCORE
One of the most important factors lenders will look at when reviewing your application is your credit score and credit report. So, to understand what they may see, be sure to review your credit report and credit score in advance. You can review a copy of your free credit report annually at AnnualCreditReport.com.
Lenders usually give more favorable interest rates and terms to borrowers who have a high credit score. However, your credit score isn’t the only financial factor the lender will review.
The lender will also review your debt-to-income ratio, which is a number used to compare your recurring monthly debt with your income.
Understanding your credit score and DTI in advance will help you determine if you need to make improvements or if you will qualify for favorable terms.
There are endless loan options. That’s why it’s important to compare lenders to ensure you find the best loan available. You may want to begin by comparing loans from banks, credit unions, peer-to-peer lending platforms or online lenders. For reference, online lenders tend to have the best rates. Try to avoid payday lenders because they usually have high fees and interest rates.
During your research, you will want to compare the following details:
· Interest rates
· Loan repayment terms
· Minimum and maximum loan amounts
· Duration of the loan with potential lenders
· Early prepayment penalties if you want to repay your loan before it’s due
· If the lender offers hardship programs if you’re unable to make payments
It’s important to note that some lenders will let you prequalify for a loan. With a prequalification application, you can see what your potential rate and terms will be before you apply. Also noteworthy is that submitting prequalification applications will result in what is commonly referred to as a soft credit inquiry and won’t impact your credit score.
PREPARE AND SUBMIT YOUR LOAN APPLICATION
Once you have found a suitable lender, it’s time to apply. For some lenders, applying may result in a hard credit inquiry, which may impact your credit score. In addition to pulling your credit report, lenders may want to review information including:
· Employment history
· Cash flow
· College degree
· Length of current residence
· How often you change cell phones
· Any professional licenses
Next, your application will go through the underwriting process. This is where lenders verify all information and may ask additional questions before approving or denying your loan. Depending on the lender you choose, you may hear an answer within 24 to 48 hours after submitting your application.
UNDERSTAND YOUR NEXT STEPS
If you’re approved for a loan, you’ll want to review the contract with a fine-toothed comb. You'll want to make a note of the loan terms, your interest rate, and extra fees that may apply.
If you're rejected, make sure you understand why. You may need to work on your credit score or other financial factors to receive approval.