When you want to take out a loan, there’s a lot to think about. Since you’ll be obligating yourself for a potentially very large amount of money, you want to ensure that you’ve done your best to find the loan that will fit your situation.
Fortunately, and unfortunately, there are plenty of options for loans available. It’s fortunate because you’ll have plenty of options to choose from to find what you need, and it’s unfortunate because there are so many options that it can be hard to determine which one is best.
Before you can begin to shop for your loan, and well before you even determine which lender you want to work with, you need to understand some of the different lending options available to you, and what the key aspects are, both for the loan and in your own circumstances, that you need to carefully weigh before you make a decision.
Your Credit Score
First and foremost, before you take any other action towards pursuing a loan, check your credit score. Your credit score is probably the most important factor in your lending experience, because it will not only determine whether or not you qualify to receive a loan from certain lenders, but also how much you’ll be allowed to borrow, and what your interest rates will be.
Don’t get me wrong – just because you may have a poor or fair credit score, it doesn’t mean that you can’t get a loan that will suit your needs. I am saying that you need to be aware of your credit score before anything else, so you you don’t have any surprises when you start talking to lenders.
Your Current Finances
Regardless of what sort of loan you’re looking to get, you’re going to be obligated to pay back both the principal (the amount you borrowed), along with the interest you accrue. If you’re already struggling financially, adding another burden to an already sinking ship is probably a terrible idea.
However, there are certainly options for loans that are designed specifically to help you recover from bad circumstances, and you should definitely consider them, but you need to be aware of what you’ll be facing. Start by verifying what your DTI is; it will serve as a good indicator as to whether or not you’re in any position to be taking on a loan, and if a lender will even be willing to work with you.
Why You Need the Loan
The purpose of your loan will go a long way in determining which type of loan will be best for you. It may seem like common sense, but certain loans are intended for certain functions, and aren’t designed to support other uses.
For example: a mortgage is set up specifically to allow the borrower to purchase a home, and naturally entails large amounts of money that will need to be spread out anywhere from 15 to 30 years, on average. A small, personal loan agency may not have the resources or procedures in place to support buying a home, since personal loans aren’t designed to lend out hundreds of thousands of dollars, to be paid back over more than a decade.
How Much Money You Need
The amount of money you need to borrow is the next factor to consider. This will play a role because, as we touched on in the last paragraph, certain lenders specialize in certain types of loans, and may or may not be equipped to support what you need. You also need to consider how much money you’re trying to borrow. This will determine if you need to wait until you can raise your credit score higher, so that you can afford your repayments and interest rates, or if you want to consider putting up some form of collateral to help you get the amount you’re looking for, which we’ll discuss later on.
How Fast You Need the Money
How quickly you need to be able to access your money will also play a role in what kind of loan you ultimately choose to pursue. The speed that a lender can get the money to you is based on a number of factors, including the type of loan you want, and the amount of money you’re borrowing.
For example: you might want to take out a loan for $3,000 to help afford a family trip to Disney World. That’s not a terribly high amount in lending circles, and a lender who specializes in personal loans will be able to get your money to you fairly quickly. By converse, a mortgage can take a great deal of time to process and move the money into an account. Since many home purchase agreements are contingent on having the money by a certain date, you can’t afford for there to be extensive delays in getting your money, or you risk losing the home.
In short, be aware of how quickly you need your money when you’re shopping for a loan.
How Long You’ll Need to Pay It Back
One of the most important aspects you’ll need to think about when selecting a loan is how long you’ll need to pay it back. I mentioned earlier that you need to have a good idea of what your DTI is before you started shopping, since it would allow you to analyze and prepare your finances. But it’s also relevant now, because it will give you a general idea of how much you can afford to pay out each month.
For reference, here’s an example: if you make $50,000 a year, and you have $17,500 in annual expenses (rent, car payment, insurance, etc.), then you’re at a 35% DTI. So far, so good. That means you’ve got $32,500 leftover each year. Since DTI doesn’t take into account shifting expenses, like credit card balances, groceries, and gas, realistically, you probably have about $23,500 leftover, or $2,000 each month. So, at most, you probably wouldn’t want to pay back more than $500 each month towards another financial obligation.
With that information in mind, against a loan of $20,000, for example, you’d need about 40 months (3 and a quarter years), to pay back your loan. Now that you know that piece of data, you can speak with your lender and see if that’s feasible.
Any Collateral You can Offer
A final point to consider, and one that may or may not have much impact, is any collateral you can offer towards securing your loan. Since collateral allows lenders to work with less risk, it may help you get a loan that you otherwise wouldn’t be able to get, one that can provide you with more money, or a lower interest rate.
Bear in mind: collateral, by its very nature, is risky for the borrower. If you default on your loan, the lender is contractually able to seize the asset you promised as collateral, and sell it to make up the difference on your loan.