If you are thinking of borrowing money, you are not alone. Research shows that about 131 million Americans have reportedly taken out personal loans. It’s normal to take out a loan, and in some cases, it is even more advisable to do so, depending on your situation.
But before you make your final decision to borrow money, have you taken the time to think through your decision fully? There is more to borrowing money than finding the right institution or lender. Before you find yourself in deep debt due to some bad decisions, take some time to read about these important factors to consider when you have to borrow money.
Select your lender carefully
Finding the perfect lender is important for taking out a loan or borrowing money. No matter what purchase you are looking to make, whether buying a new home or car, you must have a solid team ready to assist you. A good lending representative will be transparent about your options throughout the process and keep you well-informed.
When it comes to choosing a lender, you must find one ready to help you improve your credit ratings. The higher your credit score, the lower your interest rates. It takes time for you to build a good credit score. You must also create a list of lenders and thoroughly research them.
You will find that they are not alike even though they work in the same industry. Some of these traditional lenders include banks and credit unions. When you’re doing your research, you must compare rates. Sometimes, you might be tempted to go with quotes with the lowest rates. But that shouldn’t always be the case. Sometimes, some lenders offer these lower interest rates but have higher closing costs.
On the other hand, if traditional lenders do not appeal to you, you can consider looking into decentralized finance (DeFi) options. This type of financing does not rely on third parties like banks or brokerages. It uses a direct peer-to-peer approach and allows you to be in total control during the borrowing process. DeFi lending also has much better interest rates that are significantly lower than what traditional lenders offer.
There are several things to consider before deciding on your lender. Ensure that you ask the right questions and speak to the right people at all times. If you’re on the fence between the two lending options mentioned above, why don’t you weigh both traditional vs. defi lending options to make a firmer decision?
Limit how much you borrow from family and friends
When you’re in a fix and need to borrow money, it’s easier and more convenient to reach out to friends and family who have available funds to help you. Sometimes, you might have to reach out to them for many reasons, such as having a bad credit score or having some previous unpaid loans. While you might have some truly amazing and supportive friends and family who might be happy to help, it’s best if you control how much you borrow from them.
One of the most difficult things to do when borrowing from immediate relatives or close friends is that both parties might find it difficult to put the terms and conditions to paper. Instead of a contract, these deals or borrowings are usually finalized over a handshake. Most disputes from such instances stem from the lack of poor agreements.
You also run the risk of destroying your relationship, especially when you cannot pay it back at a given time. It involves several emotions when interacting with people you might be financially indebted. It’s just awkward through and through. Finally, such instances create win-lose situations, especially for the lender. Loans from friends and family typically do not have interest rates.
They are usually charged informally and at the borrower’s discretion if there are any. This situation puts the lender in the position of losing some income.
Know your reason for getting a loan
Most people take out personal loans to use for emergencies. These loans are typically paid back in monthly installments depending on your situation and how meticulous you are with paying back. But before you take out a loan, you must understand why you are doing so. You should never borrow money just for the sake of it.
This point is that having an idea of what you want to borrow, why you want to borrow, and how much you want to borrow can help you set a budget. So, what’s your reason for this loan? Some people take out personal loans for debt consolidation. It is one of the most common reasons why people take out loans. They use the money to pay off outstanding loans or credit card payments.
Other reasons could include home upgrades, moving homes, emergencies, vehicle finances, and wedding costs. You can take out a personal loan for anything. After all, that’s why it’s called a personal loan. But it would be best if you had a solid reason for doing so.
Know and understand your credit score
Taking out a personal loan can affect your credit score either in a good way or a bad way. However, if you make timely repayments, you can improve your overall score. Before visiting your lender, you must learn how a personal loan might affect your credit score.
You can calculate your credit score based on these five important factors: amounts owed, new credit, credit mix, length of your credit history, and your payment history. Credit scores range between 300 to 850. A good credit score starts from 670, whereas a poor credit score is 580 and below. In 2020, a study showed that 69% of Americans had an average score of 710, which is very good.
Having a good credit score plays a super important role in helping you qualify for access to personal loans. It’s one of the many things that lenders assess, how much you earn, how much you have in your bank accounts, and your employment history and length. If your credit score is poor, you can work on rebuilding it to make your chances of getting your loans approved in the future.
Determine how you will pay off loans
Even though you haven’t taken out your loan yet, you must have an idea or plan of how you intend on paying back to your lender. There are several options to consider for loan repayment, so it’s important to find one that best fits your situation and schedule.
When creating a repayment plan, the first thing you must do is carefully make a list of all your debts, including information such as their interest rate, the total amount of how much you owe, and the minimum payment amount. Include debts you have incurred from friends and family as well.
The next thing you must do is rank your debts according to how you would like to pay them off. Some financial experts recommend starting from the smallest amount to the biggest to keep the momentum going. It would be best if you also found means of generating extra money to pay off your debts. You can do this by limiting how much you spend.
Cut back on some other areas on your monthly budget and use those funds to pay off your debt. You can also take a part-time job or work overtime hours to help you raise more funds. The most important thing you should do when having a repayment plan is to tackle each debt once at a time. It might seem like forever, but it is completely worth it.
Understand your loan terms and conditions
When you are taking out a loan, it is important that you know and understand your loan’s crucial details and terms. This could refer to your monthly payment charges, interest rates, your due date, and other operational costs and charges. When you understand the terms of your loan, it makes it easier for you to pay it back diligently. It also helps you know whether or not you are getting a good deal.
The most important loan terms you need to familiarize yourself with are annual percentage rates (APRs), which measure how expensive your loan is by consolidating your interest rates and other charges into a single figure.
You must also understand your monthly payments (how much you will pay each month to your lender), fees (application or late fees), due date (when your repayment is due every month), as well as term length, which is the time you have to repay your loan. Knowing and understanding your loan terms and conditions will help you in the long run. You can negotiate for more favorable loans with better terms. You can also use it to shop around to find the best deals.
Throughout life, there will come a time when you might have to take a loan. Hopefully, these tips will help you make better decisions and negotiate better deals when the time comes.