Most of us find ourselves in the need of a loan at some point in our lives. In addition to common living expenses like buying a house or car and paying for college, sometimes you just need a loan application for a variety of purposes.
Statistics show that 40% of Americans can’t afford to cover a $400 emergency. This, in addition to more than 50% of Americans having less than $1000 in savings, makes loans one of the most needed financial services in the United States.
With traditional banks, credit unions, and online lending platforms all gaining popularity, is hard to know where to go. Sure, having many options can be great if you know what you are looking for. However, with 53% of adults being financially anxious, more choices mean more problems.
If you are one of these people or you just want to improve your financial literacy, this article is for you. Here, we will be highlighting 4 things you should consider when applying for a loan.
What Is A Loan?
While this might sound like a silly question, most people don’t fully understand what a loan is.
You probably know that a loan is when a certain amount of money is lent to another party for future repayment. But there is more to loans than most people think. For example, do you know the difference between a loan and a line of credit?
While pretty similar, loans and lines of credit are different concepts. It is important to talk about the concept of “non-revolving credit limit” to understand the difference. This concept means the borrower can only access one time to the amount of money that was lent.
A loan uses a non-revolving credit limit. If you get a $1000 loan, you will not get more money until you pay the $1000 back, plus interests. If you were to get a $1000 line of credit, you can owe the bank up to $1000: if you pay $500 plus interest, you can borrow $500 again.
While both loans and lines of credit require you to have a good credit rating, conditions will vary most of the time. For example, loans will usually have higher closing costs.
From the type of loan you are applying for to the specific conditions of your agreement, there are many aspects you need to consider when applying for a loan. Understanding what you are applying for will not only protect your finances in the long term but also ensure that you get the best deal.
Loans can be either secured or unsecured, depending on the need for collateral in order to get it. If you apply for a secured loan, you will need to provide some type of collateral, while unsecured loans won’t.
Car, house, and other loans that are secured by the same asset you are purchasing are secured loans.
If you don’t pay the money back, the financial institution will repossess the item you used the loan for. As the asset will lose value most of the time, in such cases the selling price will be deducted from the balance and you will be required to pay the rest.
Unsecured loans don’t require you to provide collateral. As such, these loans rely heavily on your credit history and income. Since they are not backed by any asset but your “reputation”, they are usually used for lower amounts.
As you see, there is more to loans than most people think. However, for most purposes, the different conditions that can come up will depend on what you need the loan for. This is why it is important to consider different factors before applying for a loan.
4 Things To Keep In Mind When Applying For A Loan
Applying for a loan is an important financial decision.
Failing to assess the risk they imply could be disastrous for your financial future. If you want to know more about how debt can affect your financial future and how to avoid getting there, we wrote an article on that! https://turbowallet.com/loans/8-easy-ways-to-start-dealing-with-debt/
That being said, loans are necessary for a lot of situations and can even be great for your finances.
An example of this would be getting a loan to consolidate debt… Or getting a car if it makes financial sense due to transportation costs. Whatever the need for a loan is, doing your homework will help protect your financial stability.
If you are reading this article and have made it this far, you are already on the right path. Let’s jump straight to the topic of this article!
1. Should You Apply For A Loan in The First Place?
This is the first thing you should always consider before applying for a loan. Many people apply for loans in situations where there are better alternatives or doing so is financially irresponsible. Of course, we expect that you have already considered if you really need the money, so we won’t be discussing those situations.
When considering if you should get a loan, make sure to consider what other alternatives you have.
For example, it is not unusual for people to get a personal loan for medical expenses. However, most times, those same people have not asked their doctor’s office about the possibility of getting a payment plan. What about paying for them with a medical credit card?
Knowing what other options you have at any given time is essential. Loans usually have higher interest rates than other forms of credit, such as credit cards. In some instances like discretionary spending due to vacations or a wedding, using a credit card can be a far better option.
2. What’s the Best Type Of Loan For You?
There are many different types of loans you can apply for at a given time. These range from mortgages to cars, debt consolidation, home improvement, student, business, personal, and many other types.
Choosing the best loan option for you will allow you to get the best deal.
While a personal loan won’t be enough to buy a house, it could be a better option than a debt consolidation loan in some instances. In the same way, most times getting a car loan is a better option than a personal loan, but 31% of people don’t do so.
What is important is to look at the different types of loans you could qualify for and compare them before applying for a loan. Like everything financial-related, the devil is in the details!
Aspects like being secured or insecure, interest rates, the term, associated fees, and type of interest (compound or fixed), are important things to consider. Making a pros and cons list is a great way to make sure you are getting the best deal for yourself.
3. Where Should You Get The Loan?
While loans have traditionally been associated with banks, other options have grown in popularity over the years. Credit unions and online lending platforms have become real competitors for traditional financial institutions.
When applying for a loan, choosing who you will be borrowing from is just as important as the conditions. Most times you will go to your bank to get a loan as you already have a relationship with them. However, this might not always be possible.
If going to a bank is not an option due to having an existing loan, fast funding is required, or not having a bank at all, worry not. Online platforms like OppLoans have been created to serve the more than 150 million people that lack such opportunities.
Platforms like OppLoans usually offer quick approval, fewer requisites, and easier application processes, while offering the same benefits as traditional banks. We also wrote an article on why crypto loans might be a good choice for you! https://turbowallet.com/loans/borrowing-crypto-is-making-loans-easier-than-ever/
4. How Much Can You Afford?
While you probably already considered this before considering a loan, you should always consider it twice. Sure, it is possible that you can afford paying the monthly payment… But can you afford to pay for it? How many times have you heard people talk about having a car or house they can’t afford?
It is important to make a distinction between “being able to pay” and “being able to afford”. While chances are you already considered if you can pay the loan, make sure that it won’t represent a bigger problem than the consequences of not getting it.
Considering if you can afford to pay the loan also involves calculating the total cost. Once you have some of the options in front of you, sit down and calculate the total you will pay after interest. Comparing this with your expected revenue for that period will give you a better idea of where you will be by then.
Applying for a loan shouldn’t be a decision based only on numbers. You should consider the effects it will have on the long term. Buying a house or a car will also result in new expenses in the future, but many people fail to take them into consideration. Remember to put emphasis on “afford” when thinking about your loan.