According to statistics from the Chamber of Commerce, personal loans are becoming more popular than ever before, growing by 19.2% in the first quarter of 2019 alone.
One of the reasons for this climb in popularity of the personal loan is that thanks to Fintech solutions, personal loans are now easier than ever to apply for. Gone are the days of multiple trips to your bank. Instead, you can search online for the most competitive offerings and apply within minutes.
However, while the application process is more efficient than it’s ever been—before you take out a loan there are a few key things you need to know.
Personal loans and other types of credit can be a double-edged sword. Used wisely, they can boost your finances. On the other hand, if mismanaged, a personal loan could become a financial burden.
Read on to find out everything you need to know to take out a loan the smart way.
1. Why You Need to Take out a Loan
The first thing you need to get clear on before taking out a loan is why you need it.
If you are taking out a personal loan to start something that will move you forward financially, like turning a hobby into a business, this could be a wise move that will yield returns for you in the future.
If on the other hand, you are taking a loan simply to ease cashflow, or purchase a nice car, this is generally not a financially savvy move.
In some cases, taking out a bank loan might be the only way to weather an emergency, such as an unexpected medical event. Or perhaps you really need to buy a car so that you get to a new place of work where public transport doesn’t reach. However, you probably don’t need a Tesla.
Before filling out loan applications, ascertain your reasons for taking out a loan, and whether or not you actually need it.
2. How Much You Really Need
When looking to take out a loan, the next thing you should consider is how much you need. Loan providers will have varying offers, and it can be tempting to go for the higher loan amount as it feels like one is “getting more money”.
However, in reality, the bigger the loan, the more expensive it is, and the harder it can be to repay.
Therefore, before you take out a loan, carefully weigh up how much you really need. The lower the loan amount you can work with the less you will pay in interest and the easier and quicker it can be to get the loan paid off.
When estimating how much you need, remember that as long as your credit is in good standing, you may be able to take out an additional loan down the road if this one is not enough. In most cases, this is advisable over taking out a loan that is a lot bigger than what you need and which can easily get wasted.
3. If Your Credit Report Is Accurate
Another thing you need to find out before taking out a loan is whether your credit report is accurate. The reason for this is that the better your credit score is, the better interest rates you will be eligible for when taking out a loan.
To check your credit report, draw it from all three of the main agencies, Equifax, Experian, and TransUnion. Compare the reports and look through for any errors or discrepancies. If you spot any, take them up with the rating agency asap.
4. How to Calculate the Cost of Taking a Loan
When taking out loans, what many people forget is to calculate the total cost of the loan.
The way to do this is to add up the loan and the total of all interest that you will pay as well as any fees. To calculate the interest on a potential loan, you can use an amortization calculator.
Common fees to look for and include in the total cost of the loan are late penalty fees, loan origination (loan processing) fees,repayment penalties (these usually only apply to mortgages), and failed payment fees.
5. What Are the Requirements for Taking out a Loan
Before you apply, there are few top requirements for taking out a loan which you should know about.
The first thing you need for a loan with decent interest rates is a credit score that is over 640. You will also need to have an acceptable debt-to-income ratio, preferably at or below 36%, as well as verification of your income from your employer and proof of address.
6. How to Shop Around for the Best Loan Offers
Lastly, before you take out a bank loan, you need to know how to shop around for the best loan offers.
The best place to start is usually online, as you can compare different offers within a short space of time from various lenders.
When looking at online loan solutions, ensure that you check potential solution provider’s reviews to get an idea of their reputation. One or two bad reviews shouldn’t take provider right off your list, but if you see a theme of unhappy clients, it’s best to stay away. Ultimately you want to go with a solution provider that has positive reviews overall.
Do You Need to Take out a Loan?
Getting a loan is a big step, and before you take that step it is best to be informed.
Now that you’re versed on the top six things to know before you take out a loan—are you ready to secure the funding that you need?
If so, you are in the perfect place to compare your options. Take advantage of our online loan matching tool to receive up to five loan offers tailored to your needs from our network of vetted solution providers.
If you have any questions about the process feel free to contact us and we will be happy to help you in any way we can.