Taking out a loan has been an increasingly popular way of securing funds for major expenses such as hosting special events, paying off debts, and purchasing vehicles, among other things.
If you’re sure you’re capable of borrowing and returning money, and you know you’ll be able to benefit from this source of funds, learning the ins and outs of taking out a personal loan is crucial to making the right choices.
ABA Banking Journal points out that the personal loan market has been making a resurgence recently, citing competitive rates, easy access, and a variety of options as some of the reasons behind its growth.
However, as banks and lenders have been raising their standards these past few years, you’ll also need to be on top of all the requirements and qualifications to secure a loan. Here are some things you should know before you borrow money:
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Determine your personal loan eligibility
Lenders will have unique requirements regarding who can and cannot take out a loan from them, but some common ones must be considered. Sound Dollar lists a few factors that lenders tend to look at: credit score, income, and debt-to-income ratio.
In general, these aspects help determine whether or not you’re capable of paying back the loan and if you’ll be a trustworthy steward of the money lent to you.
A credit score of 700 or higher, a consistent and high income, and a DTI ratio below 36% would be favorable indicators to the lenders. Just be sure to show proof that you get paid well enough to cover your bills.
Be aware of the fees
When borrowing money, you’re not just paying back the base amount given to you. You’ll also have to consider the various fees that come with taking out a loan.
Interest rate is the payment you’re charged monthly — on top of the principal amount — for taking out the loan.
These fees will usually be paid in monthly installments, and by stretching out the payment period, you can lessen the amount you’re paying each month.
When estimating the amount you’ll require for your loan, ensure you have enough to accommodate your annual percentage rate.
Prepare the necessary documents
Though loan application formats will differ depending on the lender, they will usually require some form of identification and proof of income before you can take out a loan.
You should present at least two government-issued IDs, like a driver’s license, passport, or birth certificate.
You may also need proof of address to ensure you have a stable living situation. Michele Ranieri, vice president of U.S. research and consulting at Transunion, remarks that employment is the strongest indicator of repayment, so it helps to show employer and income verification such as bank statements, pay stubs, and employer contact information.
Do some research on your lender, if possible, so that requirements can be prepared ahead of time.
Budget wisely
Paying off your loan is of the utmost importance, and it can show future lenders that you’ve been able to manage the funds well, so they’ll consider trusting you with their money too.
Create a budget plan per month that accommodates your payments to properly allocate the amounts you will need for certain expenses.
Here at YourEduFinance, we recommend the 50/20/30 Budget Rule so that your money can be consistently and adequately divided into 50% for your needs, 20% for your savings, and 30% for your wants.
Your loan payments will fall under your needs, so you can do some rearranging to find out how much you can spend or save to meet the 50/20/30 percentages.
Don’t sweat too much about dividing your funds accurately each time; just keep track of where your money is going to ensure you have enough for the loan and your other personal expenses.
