Getting a loan is a big financial step, no matter what your intended purpose of the loan is. It could be to buy a new house, a new car, as capital for starting a new business or as an emergency financial measure to pay a medical bill. It takes a significant financial decision, so weigh out your options carefully before you go to a lending institution. If you do need to take out a loan, make sure that you have thought it over several times and that you have considered your future actions to pay back the loan.
Consider Why You Need the Money
This is the first thing you need to consider when you are planning to loan a significant amount of money. It can build or break your credit score, but more importantly, it can put your financial management to the ultimate test. Home mortgage constitutes the most substantial loan most of us make in our lives. While it may seem like the most logical option for middle-class individuals who want to own a home, a lot of things are still considered. Chief among these is the ability to provide the down payment and if the home is within the borrower’s financial means.
Another reason for borrowing a big amount of money is for business purposes. BlueVine and other lending institutions are the most approached loan sources when it comes to various business needs. Whether it is to start up a business, to stabilize the business cash flow or to finance an expansion, business owners need a reliable lender that can provide flexible financing options and an easy, transparent application process. Business owners have a lot on their minds, and an institution that provides a quick turnaround time for receiving the much-needed funds can be a great option to keep the business going.
Consider the Amount You Can Afford to Loan and Pay Back
You may have carefully considered your options and have arrived at the decision of making a loan, but now you need to consider how much you can realistically afford and more importantly, pay back. The word afford can be tricky. You may be easily swayed by loan institutions about the annual percentage rate (APR) because this will be their primary selling point. It’s also the standard way of quickly and conveniently comparing loans.
While APR or more commonly the interest rate is an important term to consider in a loan, another equally important thing to keep in mind is the total amount repayable (TAR). This is the total amount, including the interest, that you will be paying over the life of the loan. You need to also look at this factor because not all affordable monthly payments mean low TAR. So when you think about what’s the amount you can afford, it’s not just the monthly payment that matters, but also the total amount that you’ll end up paying back.
Carefully Review the Loan Terms and All the Fees
Not all loans are created equal, and not all loans have the same terms when it comes to processing and the eventual fund release. As mentioned earlier, the APR and TAR must be easy to understand, fully disclosed and explained and the fees that you will or may incur throughout the loan. Some of the fees that you need to discuss with your lender are the following:
- Loan processing (origination) fee – This fee is common with mortgages, but more and more types of loans, including auto loans and personal loans. The loan provider can sometimes charge you to process your loan application. Some have a fixed-rate fee, while others charge $1 or more from loan’s value. It is recommended that you avoid this type of fee or ask it to be waived, especially for non-housing loans.
- Failed payment fee – this fee is charged when you don’t have money in your account to cover a payment you have made. Some lenders can charge a fee for this.
- Prepayment fee – there will be lenders that will charge you if you pay the loan off early. This is quite a common fee on personal loans. Lenders employ this tactic to get the full amount of interest from borrowers. Be sure that your credit institution doesn’t have this penalty.
- Late payment fee – this can be charged for delayed payments, even by one day. Most lenders impose this charge, and records of payment delinquency can hurt your credit score.
What’s important to keep in mind is that you know all the terms of your loan and what you are getting yourself into. A loan is considered a contractual obligation, and if you break the contract you are complicating and even harming yourself financially.
Knowing the crucial things about your loan can help you make a guided and sound financial decision. Loans can be useful tools to help us achieve our financial goals. When we set these goals through loans, we must include our loan repayment as part of our financial goal. This way, we are motivated to repay, no matter how small or big the loan amount, what is due to the lenders who helped realize our goals.