Loans are commonly used for a wide range of purposes and you may be thinking about applying for financing soon to accomplish a specific goal you have in mind. For example, student loans help you to pay for a college education and can therefore play a direct role in your earning potential throughout your adult years. A home mortgage helps you to purchase your dream home, positioning you to take advantage of tax deductions, home equity growth and more. Whether you need to apply for these or other types of loans to accomplish specific goals you have in mind, it is important to follow a few quick steps before you apply for your first loan.
Review Your Financial Situation
Before you make any major financial decision, you should always review your finances. This includes your budget, your short and long-term financial goals and your credit rating. You must ensure that the loan will provide you with benefits and that the payments will be affordable. You also need to know your credit score so that you can confidently shop for the best rates available for your specific financial situation. Examine the short and long-term impact that the financing will have on your budget and on your life.
Consider the Differences Between Secured and Unsecured Loans
Next, you must determine what type of loan you want to apply for. The two primary options are secured and unsecured loans. Secured loans use collateral, and this may be collateral that you currently own free and clear or collateral that you intend to purchase with the loan. Good examples are car loans and home mortgages. These loans generally have lower rates than unsecured loans, which do not use collateral. In addition, you may need a better credit rating to qualify for an unsecured loan. Keep in mind that the collateral may be repossessed if you fail to make payments on the loan as agreed.
Choose the Right Lender
After you have a better idea about your financial situation, your credit rating and your loan options, you can shop around for the right lender to work with. You may consider working with a specialized loan broker, who will shop around for a great rate on a loan for you. However, brokers charge fees for their services, and many people will be able to save money by working with a direct lender instead. If you can shop around for your loan on your own, you can avoid paying for broker fees by working with the lender directly. Compare interest rates, loan fees, loan terms and even the lender’s reputation before you decide which lender to choose.
Proceed With the Loan Application Process
Once you have determined which lender you want to work with, you are ready to proceed with the loan application. Most loan processes begin with the completion of an application. Some lenders will pre-qualify you initially by reviewing the loan application and your credit report, and they will tell you if you have a good chance of being approved for the loan you need based on this information. However, you may need to provide additional supporting documents, such as tax returns, pay stubs, bank statements and more. These may need to be reviewed by the lender before the loan request is approved. If you are buying a large asset, such as a house, the value of the asset may also need to be confirmed through an appraisal.
Applying for a new loan may be one of the best steps that you can take to re-position your life in various ways. For example, student loans, a home loan or even a car loan can dramatically improve your life in various ways. However, they can also affect your budget. Take time to carefully follow each of these steps to ensure that you make a thoughtful financial decision and that you choose the right lender to work with.