Being financially stable is a dream everyone strives towards, but it’s not a possibility for everyone. Extenuating circumstances can make it difficult to achieve that goal, forcing many people to resort to taking out loans.
For the first-timer, getting a personal loan can be a troublesome process, especially for those big-ticket items. Paying off loans can be an even more laborious experience that can drive some people to tears. By knowing what’s beforehand, however, you’ll be better prepared for all of the paperwork involved so that your loan process can go much more smoothly.
Get What You Need
Before you can even start the loan process, there are some important documents and pieces of information that you’ll need. Lenders will want to know your background history before they can grant you a loan and you don’t want to walk into their office unaware of what they’re looking for. Here’s the information most lenders need before they consider you for a loan:
- A report of your annual income; must be about $25,000 or more
- Reports of your credit history for the past several years
- A report of your credit rating; the lowest average score is usually 640
- A report of your debt-to-income ratio; not counting your mortgage, a ratio of 45% is preferable
Once you have all of this information gathered together, there are other key pieces of information you’ll need as well. A lender will need to know your name, age, date of birth, SSN, driver’s license number, your mailing and email address, phone number, bank account information, and the information of your employer. Be sure to have these at the ready and make copies of everything so that the lender can have them for their record.
To be eligible for a loan, you’re required to have an active savings or checking bank account, you must be 18 years of age (this may be different depending on the state you’re living in), you must have a regular source of income, and you must be a citizen or a permanent resident of the United States.
Determine the Kind of Loan You Need
Not all loans are the same, nor should they be treated as such. It’s most likely that all you’re looking for is just a personal loan, but these are unsecured. This means that a lender will use your credit as a gauge instead of an asset like you would with a home or a car. If you need a loan for something more expensive, then you’re going to need something more than a personal loan.
Look for loans based on the amount of money you need to borrow. This amount should be based on what you’re taking out the loan for plus your income. Budget your monthly earnings to see how much you can spend each month and borrow less than what you consider your maximum to be so that you’re not stretching your monthly finances too thin. Avoid taking loans that are too small or too big, as either one can ruin your finances in the long run.
Check Your Credit History
By knowing what your credit is beforehand, you will have an easier time shopping around for a lender whose requirements you meet. Because every time you’re rejected for a loan, this is added to your credit history and reflects negatively on future loans you may want to take out. It’s better to increase your chances of being approved than to apply to every lender, hoping that one will stick. You can find out more at LoanReviewHQ.com.
Completing your Application
Once you’ve found a lender you want to work with, do a little research into the company itself. Find out if they have forgiveness programs, what their limits are for different loans, and what their interest rates are.
Next, you should visit their website and find the online application form. Fill it in with your basic information and choose the kind of loan you’re applying for. From here on out, the process for each lender is a little different but they generally follow the same format.
Receiving Loan Funds
You can receive your funds in one of two ways. If your lender has your banking information, they may make a direct deposit to your account that you can have access to. That way you can spend the money as needed; just make sure you’re sticking to your budget properly.
Alternatively, you may be provided with your funds in another way. You may be given a cheque that you can then deposit into your account, or your lender may provide you with a prepaid debit card that you can use to pay for the subject matter of your loan.
Spending Your Funds
If you’ve taken a general loan, then you’re free to spend the loans in any way that you like. If you took out a loan for something specific such as a debt consolidation loan or an auto loan, however, you should only use the funds to pay for that item. Lenders will not appreciate you using those funds to pay for other things, such as your bills or mortgage.
It’s essential that you also make your loan payments on time each month. Late payments lead to extra fees and/or damaging your credit, and if you’ve budgeted your income for each month, these extra payments can throw everything off.
Ask your lender how loan payments can be made. Do you have to pay in cash? Can you pay with a credit card? Can you mail them a cheque or do you have to pay online? Can you set up an automatic payment option so that the funds are automatically taken out of your account? Knowing these options will make it easier for you to plan each month and eliminate any future hassles in getting your loan paid off in full.
How to Pay Off Your Debt
This is easy to do if you only have one debt to worry about: just follow the debt payoff plan you created before you took out your loan. But if you have multiple loans, then you’re going to have to come up with a more strategic plan that works for you.
- The Debt Avalanche Method: loans are paid in order of the highest interest first. Make the minimum payment on all loans first and put a little extra into the one with the highest interest until it is paid off. Then move down the line to the next one until all of your loans have been paid. It does take some time for you to see the results, but once you’ve built up momentum, your loans will start to fall away one by one.
- The Debt Snowball Method: loans are paid off in order from the smallest balance to the largest. The reason people like this method more is because it takes care of the smaller loans more quickly so that more money can be allocated to the other loans. However, the downside to this is that higher interest rates on the larger loans aren’t taken into account, so you could end up paying a lot more money by the end.
- Debt Settlements: creditors or lenders, in this case, are willing to accept partial payment of the loan rather than the full balance. Such settlements are only available to those who have lost their job, are recently divorced, or have undergone unplanned hardships. Some settlements will forgive up to 50% or more of the debt, but you may still be held liable for the taxes on the forgiven amount. Do your research if you’re considering a debt settlement, as there are many scammers out there who will make you pay exorbitant fees and put you into even more debt.
- Bankruptcy: if you’ve exhausted all of your funds and have no other means of obtaining enough income in time to pay off your loans, then you may have to file for bankruptcy. This is a harsh decision to make, as filing for bankruptcy can severely affect your credit score. There are two kinds, Chapter 7 (there is the surrendering of property that is sold to pay off some amount of the loan), and Chapter 13 (you’re allowed to keep your property and time is given for you to recover to acquire sufficient income to restarting paying your loan).
You should discuss with your lender beforehand what measures are taken when you’re unable to pay for a loan on a regular or timely basis. This will prepare you for what is to come on the off chance this occurs so that you’re not taken by surprise when your lender contacts you.
Loans can be quite helpful in supplementing your income, as long as you’re responsible with how you use your loan and how well you can budget your income each month. Staying on top of your payments will not only help you to keep your funds in order, but you will also appear more responsible to lenders and increase your chances of taking out other loans in the future.